IRS Guidance on Claiming New Tip and Overtime Deductions

In Summary

• Since the IRS has waived separate reporting requirements for employers in 2025, workers must manually calculate their own deductions using existing records—such as Box 7 (Social Security tips) on the W-2 or by applying a one-third “reasonable method” multiplier to total overtime pay to isolate the deductible FLSA premium (the “half” in time-and-a-half).

• To simplify the 2025 rollout, the IRS has temporarily suspended complex “specified service trade or business” (SSTB) restrictions, allowing any worker in a traditionally tipped occupation to claim the deduction (up to $25,000 for tips and $12,500 for overtime) regardless of their employer’s specific business type, provided they fall below the income phase-out thresholds.

Roughly 6 million U.S. workers rely on tipped income, and more than 80 million earn hourly wages, many of whom receive overtime pay. To support this large segment of the workforce as new tax rules take effect in 2025, the Treasury Department and IRS have released Notice 2025-69, which explains how workers can calculate the new deductions for qualified tips and overtime compensation created under the One Big Beautiful Bill Act (OBBBA).

The need for this guidance stems from Notice 2025-62, which designated 2025 as a transition year and removed the requirement for employers to separately report qualified tips or overtime premiums on 2025 forms. As a result, workers will need to determine the amounts themselves using existing pay records. To help clients, prospects, and others, Wilson Lewis has summarized the key details below.

What Is Notice 2025-69?

Notice 2025-69 explains how workers can calculate the new tip and overtime deductions on a 2025 tax return. It lays out what counts as qualified tips and qualified overtime, what records can be used, and how to figure out the right amounts when pay stubs do not show them separately. It also identifies the income limits and annual caps that apply. These instructions are temporary and apply this year only, until new reporting requirements take effect in 2026.

Qualified Tips Deduction

Workers in tipped occupations can deduct up to $25,000 of qualified tips for 2025. To qualify, the tips must be from a job that “customarily and regularly received tips” before the end of 2024, which generally includes roles in restaurants, hospitality, personal services, delivery, and similar fields. The deduction phases out at incomes above $150,000 for single filers and $300,000 for joint filers. Married filing separately is not allowed.

Because employers are not required to break out qualified tips this year, Notice 2025-69 identifies several ways a worker can total tip income for the deduction:

• Use the total amount of Social Security tips reported in Box 7 of Form W-2.
• Use the total amount of tips reported to the employer on all Forms 4070 (or similar monthly reports).
• If an employer voluntarily reports cash tips in Box 14 of Form W-2 (or on a separate statement), that amount may be used.
• Include any amount listed on line 4 of Form 4137, the line used to report tips the employer did not record.

The notice provides an example of how these sources can be combined. A worker with $18,000 in Social Security tips in Box 7 and an additional $2,500 reported directly to the employer may total the two amounts for $20,500 in qualified tips. That’s below the $25,000 cap and likely eligible for deduction if within the income limits.

Self-employed workers or those paid through delivery apps or point-of-sale systems are encouraged to use transaction logs, any available statements, or personal notes to document tip income for 2025. The IRS is also offering transition-year relief from the specified service trade or business rules (SSTB), and additional guidance on that issue is expected.

Overtime Deduction

Workers who earn overtime premiums can deduct up to $12,500 in qualified overtime for 2025, or $25,000 on a joint return. The deduction applies only to the premium portion of overtime pay required under federal law. That’s typically the additional “half” paid in time-and-a-half.

Because many pay stubs list only total overtime wages without separating the premium, the notice outlines several ways to determine the correct amount:

• If the pay stub shows the FLSA overtime premium separately, that amount may be used.
• If the pay stub lists only the total amount paid at time-and-a-half, dividing that amount by three isolates the premium portion.
• If overtime is paid at double time and the stub shows only the total, dividing the amount by four identifies the eligible premium.
• Additional methods apply for public safety employees, workers on 14-day or 28-day overtime cycles, and employees who receive compensatory time instead of cash overtime.

Here’s an example. If a worker receives $9,000 in total overtime wages paid at time-and-a-half, dividing that number by three produces $3,000 of qualified overtime compensation. That amount can be deducted if the worker falls within the income limits.

Key Takeaways for Individuals and Employers

Workers will want to review pay stubs and year-end tax forms carefully in 2025, since qualified tips and overtime premiums will not be reported separately. Personal records may be needed to confirm totals and calculate the deductions accurately.

Employers are encouraged to provide breakdowns of tip income or overtime premiums, even though this is voluntary and optional for 2025. This can help more employees claim the deduction successfully. Additionally, the reporting requirements will be in effect for 2026, so businesses that start now will be better prepared for the year ahead. 

Contact Us

Notice 2025-69 offers a roadmap for calculating new deductions during the transition year. More guidance is expected as the IRS prepares for updated and full reporting rules in 2026. If you have questions about the information outlined above or need assistance with another tax or accounting issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.