Qualified Tips and Overtime Deduction

I wanted to bring to your attention recent IRS guidance (Notice 2025-69) regarding new federal income tax deductions for “qualified tips” and “qualified overtime compensation” for the 2025 tax year. These deductions were introduced by the One, Big, Beautiful Bill Act (OBBBA), and the IRS has now clarified how individuals can claim them, especially since employers and payors are not required to separately report these amounts on 2025 information returns.

Below is a summary of the key provisions:

1. Qualified Tips Deduction

• Individuals in occupations that customarily and regularly received tips as of December 31, 2024, may deduct “qualified tips” received in 2025.
• “Qualified tips” include cash tips (including charged tips and tips received under tip-sharing arrangements) that are paid voluntarily and not negotiated, and are received in eligible occupations (to be listed by the Secretary).
• The deduction is limited to $25,000 per year, with a phase-out for modified adjusted gross income (MAGI) over $150,000 ($300,000 for joint filers).
• For 2025, you may substantiate the deduction using:
  • Box 7 of Form W-2 (social security tips)
  • Total tips reported to your employer on Forms 4070
  • Amounts in box 14 of Form W-2 (if provided)
  • Tips reported on Form 4137, line 4
  • For non-employees, tips included in Forms 1099-MISC, 1099-NEC, or 1099-K, supported by logs or receipts
• There is transition relief for 2025: the IRS will not enforce the exclusion for tips received in a specified service trade or business if your occupation is on the Secretary’s list.
• The deduction is only available if you include your social security number on the return and, if married, file jointly.

2. Qualified Overtime Compensation Deduction

• Individuals who receive “qualified overtime compensation” in 2025 may deduct the FLSA-required overtime premium (the extra half-time in “time-and-a-half”).
• The deduction is limited to $12,500 per return ($25,000 for joint filers), phased out for MAGI over $150,000 ($300,000 for joint filers).
• For 2025, you may substantiate the deduction using:
  • A separate accounting from your employer (e.g., box 14 of Form W-2)
  • Payroll or pay statements showing the FLSA overtime premium
  • If only total overtime is shown, you may use one-third of that amount; if paid at double time, use one-fourth
  • Other reasonable methods based on available records
• This applies only to FLSA-eligible employees (not exempt employees or those only eligible for state overtime).
• The deduction is only available if you include your social security number on the return and, if married, file jointly.

3. Transition and Administrative Provisions

• Employers and payors are not required to separately report qualified tips or overtime on 2025 information returns; this will begin in 2026.
• You must maintain adequate records to substantiate both eligibility and the amount of any deduction claimed.
• The IRS has provided transition relief for certain requirements and included detailed examples in the notice.

4. Applicability

• This guidance applies only to the 2025 tax year. The IRS intends to update forms and provide further guidance for future years.