No tax on tips for S Corporation shareholder / employee

[AMS ACCOUNTANTS]

Can a sole shareholder of an S Corporation qualify for the no tax on tips?

Form W-2 worksheet, part III, line 10; Question Do any uncommon situations apply to these tips?

When I check "Yes", as the shareholder owns 100% of the S Corporation, the deduction is not allowed!

What part of the regulation does this apply to?

[Terry53029]

See 26 US Code 224. Link: https://www.law.cornell.edu/uscode/text/26/224.

Note that SSTB business are excluded, and if not a SSTB maybe. I believe if they receive a w2 no. I'm hopeful we will get more guidance from IRS for S-Corps

[AMS ACCOUNTANTS]

I don't see anything there that would prevent an S Corporation shareholder form taking the deduction. In fact section (c) seems to specifically allow it:

(c) Tips received in course of trade or business

In the case of qualified tips received by an individual during any taxable year in the course of a trade or business (other than the trade or business of performing services as an employee) of such individual, such qualified tips shall be taken into account under subsection (a) only to the extent that the gross income for the taxpayer from such trade or business for such taxable year (including such qualified tips) exceeds the sum of the deductions (other than the deduction allowed under this section) allocable to the trade or business in which such qualified tips are received by the individual for such taxable year.

[Terry53029]

@AMS ACCOUNTANTS  see the code section

[AMS ACCOUNTANTS]

I see the code, what section are you referring to to support your position? This is not an SSTB (didn't mention anything about an SSTB in my post). The corporation is in a qualifying industry for tip exemption. Of course the sole shareholder / employee is going to get a form W-2 that will show the tip income received. Please explain the reason for the question on line 10, part III of form W-2 Worksheet?

[BobKamman]

You're not going to find any answers in the Code. You'll find some in the proposed Regulations issued by Treasury in September.  

https://www.federalregister.gov/documents/2025/09/22/2025-18278/occupations-that-customarily-and-reg...  

S Corporation isn't what matters.  SSTB is what matters.  Here is one explanation:

In addition, people involved in entertainment, such as singers, musicians, comedians and dancers, are listed among the occupations that have customarily received tips. This may lead to some confusion, however, because specified service businesses, including businesses in the fields of law, accounting, health investment management, sports, and the performing arts, are excluded from the list. An example in the proposed regulation states that tips received by a comedian performing at an entertainment venue are not eligible for the NTOT Deduction because the comedian is engaged in the business of the performing arts, a specified service business.

Under the proposed regulation, this carve-out of specified service businesses not eligible for the NTOT Deduction is determined at the business level, not the worker level. The regulation cites, as an example, a musician who is employed by a hotel who plays the piano in the hotel’s lobby and receives tips. According to the example, the tips received by the musician are qualified tips because the musician is providing a performing arts service as an employee of the hotel, which is not a specified service business excluded from NTOT Deduction treatment. Meanwhile, bartenders and waiters employed by music venues and theaters would not be eligible for the NTOT Deduction because these businesses are involved in the performing arts field.

The proposed regulation does, however, provide that contract foodservice operator employees are eligible for the NTOT deduction. The regulation gives an example of a bartender who is employed by a food service company that provides food and beverage services for a theater. The example concludes that the tips received by the bartender are eligible for the NTOT Deduction because his employer, the food and beverage services company, is engaged in food and beverage services, which is not a specified service business excluded from the NTOT Deduction.

https://www.gtlaw.com/en/insights/2025/10/treasury-releases-no-tax-on-tips-proposed-regulation

[AMS ACCOUNTANTS]

So I haven't read the entire proposed regulation but, I think I see the language that prompted question 10, part III, form W-2 worksheet:

1. Qualified Tips

D. Other Requirements

Section 224(d)(2) provides that the term “qualified tips” does not include amounts received by an individual unless such other requirements as may be established by the Secretary in regulations or other guidance are satisfied. The proposed regulations would provide that amounts received for services the performance of which is a felony or misdemeanor under applicable law are not qualified tips. In addition, the proposed regulations would provide that amounts received for prostitution services and pornographic activity are not qualified tips. Finally, to prevent reclassification of income as qualified tips, and to prevent abuse of the deduction, the proposed regulations would also provide that a payment is not a qualified tip if the tip recipient has an ownership interest in or is employed by the payor of the tip.

Sub-question on form W-2 worksheet, Part III, question 10; "I own or have ownership interest in this company"

I read that to mean "do you have ownership interest in the company that issued the W-2" 

I believe it should read "I own or have partial ownership of the payor of the tip"

Here's the facts: beautician, sloe shareholder of an S Corporation that she works for and receives tip income from her customers that are then reported on her W-2.

I will be taking the deduction based on what I understand so far!

[Jim-from-Ohio]

I heard about a waiver for tax year 2025 for SSTBs

The "SSTB tips waiver" refers to a temporary IRS rule for the 2025 tax year (under the OBBBA law) where workers in Specified Service Trades or Businesses (SSTBs), like health, law, or accounting, can claim the new "no tax on tips" deduction if their occupation is on a special IRS list and they meet other criteria, despite the usual SSTB restrictions. This waiver, detailed in IRS Notice 2025-69, allows temporary relief from SSTB rules for eligible tipped workers, but strict income limits ($150k/$300k AGI) and occupation codes apply for 2025, with full rules coming later. 

[BobKamman]

@AMS ACCOUNTANTS  " if the tip recipient has an ownership interest in or is employed by the payor of the tip."

The payor of the tip is not the company.  The payor of the tip is the person who leaves the tip.  If John Doe, owner of the employer, directly pays the tip, there is a problem.  If Richard Roe, a customer of the employer, directly pays the tip there is no problem, even if the recipient is John Doe.  

[AMS ACCOUNTANTS]

That's what I said!

[BobKamman]

From Notice 2025-69:

Accordingly, in the interest of sound tax administration, there will be a transition period for purposes of IRS enforcement and administration with regard to the specified service trade or business requirement. Specifically, until January 1 of the first calendar year following the issuance of final regulations regarding the determination of whether a trade or business is a specified service trade or business for purposes of section 224 and associated employer information reporting, the IRS will treat the employee as having received tips in the course of a trade or business that is not a specified service trade or business if the employee is in an occupation that customarily and regularly received tips on or before December 31, 2024, as provided by the Secretary. The Treasury Department and the IRS intend to issue proposed regulations and solicit public comment on these issues before publishing final regulations.