Understanding New Tax Deductions for 2025: What Small Business Owners Need to Know

The IRS has released Notice 2025-69, providing clarity on two significant new deductions under the One, Big, Beautiful Bill Act (OBBBA). If you earn tips, work overtime, or employ workers who do, these rules may impact your 2025 tax return. These deductions apply for tax years 2025 through 2028. For 2025, the IRS is allowing simplified methods due to delayed reporting updates.

Deduction for Qualified Tips (Up to $25,000)

Workers in occupations that typically receive tips before December 31, 2024, such as restaurant servers, bartenders, barbers, stylists, rideshare drivers, and tour guides, may deduct their cash tips for federal income tax purposes.

How to Calculate Your Deductible Tips for 2025

Because 2025 W-2s and 1099s will NOT separately list tips, the IRS allows workers to use:

• W-2 Box 7 (social security tips)

• Total tips reported monthly to employers (Form 4070)

• Any employer-reported amounts in Box 14

• Unreported but disclosed tips on Form 4137

  
  

Self-employed workers can use tip logs, POS system reports, or TPSO 1099-K data.

Good News: Temporary IRS Relief

A key requirement of the new law excludes tips earned in “specified service trades or businesses.” Since most workers have never had to determine whether their employer falls into this category, the IRS is delaying enforcement. Until final regulations are issued, most tipped workers will be considered eligible.

Deduction for Qualified Overtime Compensation (Up to $12,500 / $25,000 Joint)

This deduction applies to the FLSA overtime premium—typically the “half-time” portion in time-and-a-half pay. Because 2025 forms will also not separately report this amount, the IRS allows several reasonable calculation methods:

• Use paystub entries that list overtime premium

• If overtime is shown as one combined number, use one-third of the total

• If the employer pays double time, use one-half or one-fourth depending on format

• Reconstruct using hours worked × regular rate if necessary

• Request supporting information from your employer

  
  

Only FLSA-eligible non-exempt workers qualify. Premiums paid solely because of state law or employer policy generally do not count.

What Should Taxpayers Do Now?

• Start tracking tips and overtime more closely.

• Keep copies of paystubs, POS reports, or tip logs.

• Confirm whether you are FLSA-eligible for overtime.

• Store all supporting documents with your 2025 tax records.

  
  

These deductions could be worth thousands of dollars. Proper documentation will be key when filing your 2025 return.

Additional Considerations for Small Business Owners

As a small business owner, understanding these deductions can significantly impact your financial health. Here are some additional steps you can take:

Review Your Payroll Practices

Make sure your payroll system accurately tracks tips and overtime. This will help you and your employees maximize deductions.

Educate Your Employees

Inform your employees about these new deductions. Encourage them to keep accurate records of their tips and overtime hours.

Consult with a Financial Advisor

If you’re unsure about how these deductions apply to your situation, consider consulting with a financial advisor. They can provide tailored advice and help you navigate the complexities of tax laws.

Planning for the Future

As we move closer to 2025, it’s essential to plan ahead. Here are some strategies to consider:

Set Up a Record-Keeping System

Create a system for tracking tips and overtime. This could be as simple as a spreadsheet or a more sophisticated accounting software solution.

Stay Informed

Tax laws can change frequently. Stay updated on any changes that may affect your business. Subscribe to newsletters or follow trusted financial news sources.

Focus on Growth

With the right financial strategies in place, you can focus on growing your business. Simplifying your bookkeeping and tax complexities will allow you to make confident business decisions.

If you want help evaluating your eligibility or planning ahead, our team is here to guide you. We aim to be your trusted financial partner, simplifying your bookkeeping and tax complexities so you can focus on growth.