The IRS has extended its annual e-file system shutdown to December 26, 2025, when the
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The IRS has issued Notice 2025-69, providing critical guidance clients who receive tips or overtime compensation. These new deductions, created by the One, Big, Beautiful Bill Act (OBBBA), apply to tax years 2025 through 2028, affecting millions of workers who rely on tips and overtime as part of their regular income. However, the 2025 tax year presents unique challenges since Forms W-2 and 1099 won’t be updated to separately report these amounts until 2026.
No Tax on Tips Deduction
Eligible workers can deduct up to $25,000 annually in qualified tips under Section 224. The deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers). The IRS estimates that 6 million workers report tipped wages, making this a significant opportunity for client tax savings.
To qualify for these deductions, tips must be received in an occupation that customarily and regularly received tips on or before December 31, 2024. Importantly, tips cannot be received in connection with a “specified service trade or business” as defined in Section 199A(d)(2). However, the IRS is providing transition relief for 2025—if your client is in a traditionally tipped occupation, they’re currently eligible while the IRS develops further guidance.
Calculating the Tips Deduction for 2025
Since 2025 Forms W-2 won’t separately account for cash tips, the IRS has provided several methods for employees to determine their qualified tips amount. Employees may use (1), (2), OR (3), and may additionally include (4) unreported tips from Form 4137:
- the total social security tips in Box 7 of Form W-2;
- the total tips reported to their employer on all Forms 4070 during the year;
- (3) any amount the employer voluntarily reports in Box 14 or on a separate statement;
- or (4) unreported tips listed on Form 4137, line 4.
For self-employed individuals receiving tips through platforms like third-party settlement organizations, the calculation requires additional documentation. Since Form 1099-K won’t separately identify tips for 2025, your clients must maintain earnings statements, daily tip logs, receipts, or point-of-sale system reports to substantiate their tip amounts.
There is one important limitation for self-employed clients—they can only deduct tips to the extent their business shows a profit. If business deductions exceed gross income (including tips), the tip deduction is limited to the net profit amount. This limitation does not apply to employees.
No Tax on Overtime Deduction
Section 225 allows workers to deduct qualified overtime compensation—specifically, the premium portion that exceeds their regular rate of pay. For most employees, this is the “half” in “time-and-a-half” compensation required under the Fair Labor Standards Act. The maximum deduction is $12,500 per return ($25,000 for joint filers), with the same phase-out thresholds as the tips deduction.
The key challenge: only FLSA-required overtime premiums qualify. Your clients must be both covered by and not exempt from the FLSA. State-mandated overtime or voluntary employer premiums beyond FLSA requirements don’t count. If an employer isn’t required to pay overtime under federal law, the deduction isn’t available regardless of what the client actually receives.
Calculating Overtime for 2025
Without separate reporting on 2025 forms, you’ll need to help clients extract overtime premium amounts from pay stubs and earnings statements. The IRS provides several calculation methods depending on how employers report overtime. If a pay stub shows the “overtime premium” separately, use that amount. If it shows total overtime pay (premium plus regular wages for overtime hours), divide by three to isolate the premium portion.
For employers paying double-time or other enhanced rates, different calculations apply. If overtime is paid at two times the regular rate and the pay stub shows the total premium amount, multiply by one-half. If it shows total overtime compensation, divide by four. The Notice 2025-69 provides six detailed examples covering various scenarios, including special rules for law enforcement, firefighters, and healthcare workers subject to alternative FLSA work period rules.
What Does Your Client Need to Qualify for Deductions?
There are a few stipulations that a client must adhere to qualify for deductions on tips and overtime. Both deductions require joint filing for married taxpayers—no exceptions. Clients must also include a valid Social Security number on their return. Most importantly, ensure your client is keeping adequate documentation. Advise clients to retain all their pay stubs, Forms 4070, tip logs, and earnings statements for 2025. These records will be necessary to substantiate both the client’s eligibility and their deduction amount.
Stay tuned! The IRS will be releasing more updates to income tax forms and instructions for the 2026 filing season in the future. While we wait to hear from the IRS, take this time to start proactive planning with your tipped and overtime clients to maximize their tax benefits through 2028. It’s never too early to have a conversations that prepare clients for success in the future.
For more information on the IRS’s new guidance on taxes and overtime deductions, please see the following from the IRS:
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