No tax on tips: The Zelle problem we didn’t see coming

Let’s keep the conversation going on No Tax on Tips, because this is where we have tax advisory.

We now have Notice 2025-69, which gave us a very important clarification: Only tips that are included on Form 1099-NEC, 1099-MISC, or 1099-K count toward the tip deduction.

This matters. A lot.

This became very real for me during a conversation with my hairstylist, and it’s a situation many of our clients may already be in.

I have always paid my hairstylist through Zelle. We both liked it because Zelle avoids credit card processing fees. It’s simple, clean, and cheaper for her.

Back in May, when the talk of “no tax on tips” was circulating, but before anything officially passed, I told her the good news. She was excited because mostly every client tips. Trust me, business owners know exactly which clients don’t tip!

Then the law passed.

Section 224 stated the requirements for qualified tips, and from what I read, my hairstylist checked every box:

• The industry must be one that has customarily received tips prior to 2025  ✔️; it’s very common for hairstylist to receive tips, even before 2025
• Tips received from customers, paid in cash or charged ✔️; I pay her via Zelle.
• Tips must be voluntary ✔️; I even tipped extra when she straightened my hair instead of my usual blow dry.
• Deduction capped at $25,000 ✔️; She easily gets tipped by most clients, for the year she has received close to this amount.
• Not be a Specified Service Trade or Business ✔️
• If married, must file married filing jointly ✔️
• Valid Social Security number authorized for work ✔️

At that point, everything looked good.

Then comes the fine print … Section 224(g) gave the Treasury Secretary the authority to establish additional requirements for what counts as qualified tips.

Well … the Treasury Secretary on November 21, 2025, issued Notice 2025-69 where they stated: “Tips received by non-employees only qualify if they are included in amounts reported on Form 1099-NEC, 1099-MISC, or 1099-K. “

Zelle is not a third-party settlement organization (TPSO); it’s a bank-to-bank transfer.

That means:

• No Form 1099-K.
• No automatic reporting of those tips on an official 1099.
• No way for those tips to qualify for the deduction under the notice.

Right before the holidays, I had to break the news to her. The very payments we thought were “smart” from a fee perspective were now disqualifying her a tax deduction.

Advisory moment: Change the business process?

This is where you come in as a tax advisor. The conversation is not “Just switch to only accepting credit cards.”

The real conversation is:

• What is her effective tax rate?
• How much tip income do you typically get in a year? Is it close to $25,000 or much less than that?
• What is the actual tax savings from the deduction?
• How much would she pay in credit card processing fees?
• Is the return on investment there?

For some clients, the answer will be yes. For others, absolutely not. That will be a decision your client makes, but as advisors, we are there to help them understand the requirements and estimate the tax savings, or there might not be savings 

And that’s exactly why this is not a quick-answer tax prep issue. This is advisory work.

Keep leaning into these conversations. This is where the real impact and real value is.  This is where tax pros move beyond forms and into strategy.