New for 2025: IRS Releases Guidance on the New Tip & Overtime Deductions

The IRS has released Notice 2025-69, giving much-needed clarity on two major new deductions created 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 — and for 2025, the IRS is allowing simplified methods due to delayed reporting updates.

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

Workers in occupations that customarily received tips before December 31, 2024 (such as restaurant servers, bartenders, barbers, stylists, rideshare drivers, tour guides, etc.) 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 is allowing 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, and

• Unreported but disclosed tips on Form 4137.

Self-employed workers may 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.

2. 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 also will not separately report this amount, the IRS is allowing 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 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 — and proper documentation will be key when filing your 2025 return.

If you want help evaluating your eligibility or planning ahead, our team is here to guide you.