Tax practitioners face a unique challenge: implementing retroactive tax changes that took effect January 1, 2025, without proper guidance, updated forms, or clear documentation requirements. In this episode of Federal Tax Updates, hosts Roger Harris, EA, and Annie Schwab, CPA, break down what we know so far about the “no tax on tips” provisions and other changes from the One Big Beautiful Bill Act (OB3), while addressing the mounting concerns about IRS workforce reductions and budget cuts.
The Surprising List of Tip-Eligible Occupations
The IRS recently released a preliminary list of 68 occupations that qualify for the new tip exclusions, and while many were expected, others caught practitioners off guard.
The obvious categories made the cut: bartenders, servers, hotel staff, and other traditional tipped workers in food service and hospitality. But the list extends beyond what most people consider tipping territory. Plumbers, HVAC technicians, lawn maintenance workers, wedding photographers, event planners, and even the people who set up beach chairs are now classified as customarily receiving tips.
“I gotta tell you, I’ve never even thought about tipping my plumber,” Harris admits. “I was just glad he showed up, or she showed up and fixed whatever the problem was.”
Perhaps most surprising to the hosts was finding their own profession on the list. “Social media creators, digital content creators, podcasters,” Schwab reads, laughing. “Apparently we’re supposed to be getting tips, Roger. Let me know if you need my address or my email or something. You can drop me a gift card.”
The list also includes a mysteriously vague category of “dancers” positioned right after the gambling section, leaving practitioners to wonder about specific definitions and scope.
Harris raises a critical compliance concern based on his experience reviewing W-2s: “I’ve seen a lot of W-2s for plumbers. I’ve never seen tips on any plumbers’ W-2s. I got a feeling if they were getting tips before, they’ve been tax free in one way or another.”
This observation points to a potential problem. Since these provisions expire in 2028, will businesses suddenly start reporting tips just to claim the exclusion, then stop when the law expires? As Harris puts it, could this be “smoking out certain people”?
The Timeline Problem: Retroactive Rules Without Current Guidance
While Congress made these provisions retroactive to January 1, 2025, the Treasury announced it will not update 2025 W-2s, W-4s, and withholding tables. This creates a frustrating gap between political promises and practical reality.
“Your paycheck’s not going to change for 2025,” Schwab explains. “All of these qualifying workers are going to have to wait until they file their 2025 tax return to see the benefits.”
The documentation challenge becomes even more complex when you consider that businesses are supposed to track something retroactively. “We’re going to be putting numbers out on forms and claiming deductions when it was impossible to keep the records because we didn’t know we had to,” Harris points out.
There are also important limits to understand. The income thresholds are $150,000 for single filers and $300,000 for joint filers. As Harris notes, “If you work at a New York Steakhouse, this might not be quite as advantageous as if you work at the Corner Cafe in Ludowici, Georgia.”
The tip exclusion caps add another layer of complexity. It’s $25,000 for married couples and $12,500 for single filers, but there’s a nuance many might miss. “If you are married and one spouse has tips, those tips can be claimed all the way up to 25,000, assuming the other spouse is not claiming tips,” Schwab clarifies. “It doesn’t have to just be 12,500 each.”
Looking ahead to 2026, the draft W-4 has expanded to nine pages of instructions, attempting to capture not just tips and overtime but also senior deductions and car loan interest. Harris describes it as essentially asking workers to complete their own tax return just to figure out withholding.
The IRS Crisis: Workforce Cuts Meet Implementation Challenges
Just as practitioners need the IRS most, the agency faces unprecedented challenges. The workforce has been reduced by 25% through terminations and buyouts, with proposed budget cuts that could take funding back to 2011 levels.
A recent TIGTA investigation revealed troubling details about how terminations were handled. “Those probationary employees were all let go and got a notice that their work was unsatisfactory,” Harris explains. “Well, TIGTA said most of those people had never been reviewed.”
Of those who had been reviewed, approximately 95% had received satisfactory grades, yet were terminated for unsatisfactory performance anyway.
The atmosphere within the IRS has become one of fear. Harris shares a concerning observation from an IRS employee about those who signed off on these terminations. “The president has immunity. I don’t.” Another story involves someone who “spoke up in a meeting and was summarily walked out the front door and fired” for saying something leadership didn’t want to hear.
“You don’t know who’s coming, who’s going, are you next on the chopping block?” Schwab says. “I can’t even imagine not just the stress, but the tension in that work environment.”
The House is proposing a 25% cut to the IRS budget, with most cuts coming from enforcement. While politically popular, Harris offers an analogy about why enforcement matters: “How fast would we all drive on our highways if there were no state patrol looking for speeders? That doesn’t mean they pull every car over. They pull enough over to slow the rest of us down.”
Without adequate enforcement, honest businesses face unfair competition. Harris shares an example: “I can have Plumber A, who treats all their employees as employees, reports all their income, does all the right things, competing for a job against Plumber B, who decides the IRS doesn’t have any way to do enforcement. All of Plumber B’s people are contractors and he skims a little bit of money off the top.”
This creates pressure on practitioners too. “I talked to a tax preparer down the street who does the same thing you do, and they tell me I don’t have to do all that stuff,” Harris says, describing what practitioners hear from clients. “If there’s no IRS enforcement, what clients are going to keep coming to you?”
For the first time in years, IRS contacts are expressing concern about filing season. “There’s a chance that this filing season could not go smoothly,” Harris reports. “And if you want to get the taxpayers’ attention, hold their refunds up. That’ll get their attention in a hurry.”
What Practitioners Can Do Now
Despite the challenges, there are concrete steps practitioners can take to prepare and potentially influence outcomes.
First, the draft W-2 and W-4 forms are currently open for public comment. This is a critical opportunity to provide feedback before these complex forms become final. “Otherwise, the service just thinks everything’s fine,” Schwab emphasizes.
Harris suggests one specific improvement worth advocating for: allowing workers to reduce withholding when they expect refunds, not just increase it when they owe. The practitioner community could also serve as a resource for the IRS during this period of reduced staffing. “The practitioner community has a lot of valuable information and ability to be a resource to help you do things,” Harris notes. “And you don’t have to pay us. You just have to listen to us.”
For now, practitioners should prepare clients for the reality that promised benefits won’t appear in 2025 paychecks and that documentation requirements remain unclear. Consider how to track tips and overtime for clients in newly qualified occupations, even without formal guidance.
State complications add another layer to consider. “This is only at the federal level,” Schwab reminds listeners. “States have the opportunity to jump on the bandwagon or have a different version of this or deny it altogether.” No states have announced definitive positions yet, creating potential conflicts between federal and state treatment.
Looking Ahead
The 2025 tax season promises to test the limits of good faith compliance. Practitioners are being asked to implement provisions they don’t fully understand, using documentation that doesn’t exist, while the agency meant to provide guidance struggles with reduced resources.
Yet this challenging period also presents opportunities. By engaging in the comment process, sharing practical insights, and maintaining professional standards even amid uncertainty, practitioners can help shape better outcomes for everyone.
As Harris and Schwab conclude, we’re all navigating this together. “And if you’re feeling generous with those newly tax-free tips, they’re apparently qualified to receive them as podcast hosts.”
Listen to the full episode for complete insights into these challenges and practical suggestions for managing the uncertainty ahead. In these unprecedented times, staying informed isn’t just helpful; it’s essential for serving clients effectively.
And, for help managing your firm, from practice management to tax support and marketing, learn more about having your firm join the Padgett network.