The IRS has released new guidance clarifying how workers can claim tax deductions for tips and overtime pay received during 2025. Notice 2025-69, published on November 21, provides detailed instructions for approximately 6 million tipped workers and overtime earners on how to calculate and claim these new deductions without requiring additional forms from their employers.
Under the One, Big, Beautiful Bill, eligible workers can now deduct qualified tips and overtime compensation for tax years 2025 through 2028. The guidance addresses practical questions about how to determine deduction amounts when employers haven’t separated tip income or overtime premiums on standard tax forms like W-2s and 1099s.
New Deduction Limits for Tips and Overtime
For qualified tips, workers can deduct up to $25,000 annually, with the benefit phasing out for individuals with modified adjusted gross income over $150,000 or $300,000 for joint filers. The deduction applies to workers in tip-eligible occupations, including restaurant servers, bartenders, and self-employed service providers like tour guides.
The overtime deduction allows workers to deduct the “premium” portion of their overtime pay—typically the “half” in “time-and-a-half” compensation required by the Fair Labor Standards Act. The maximum annual deduction is $12,500 for individual filers and $25,000 for joint filers, with the same income phase-out thresholds as the tip deduction.
How Workers Can Calculate Their Deductions
The guidance provides specific examples of how workers can substantiate their deductions using existing documentation. For tipped workers, the IRS explains that they can use amounts reported in Box 7 of their W-2 forms, tip reports submitted to employers on Form 4070, or unreported tips documented on Form 4137.
Self-employed workers who receive tips through third-party payment platforms can use daily tip logs to substantiate their deduction amounts, even when Form 1099-K doesn’t separately identify tips from other payments.
For overtime workers, the calculation depends on their employer’s overtime rate. Workers receiving standard time-and-a-half pay can divide their total overtime compensation by three to determine the deductible premium portion. Those receiving double-time pay would divide by four to isolate the premium amount.
Transition Relief and Practical Implementation
The IRS has provided transition relief for 2025, waiving certain restrictions that would normally apply to workers in “specified service trade or business” occupations for tip deductions. This ensures that eligible tipped workers can claim the deduction regardless of their specific industry classification.
The deduction is available to both itemizing and non-itemizing taxpayers as an above-the-line deduction, which reduces adjusted gross income. The IRS emphasized that workers should maintain documentation such as pay statements, tip logs, and employer reports to support their deduction claims.
Both deductions require workers to have received compensation that complies with Fair Labor Standards Act requirements. Employees who are exempt from FLSA overtime rules cannot claim the overtime deduction, and tip deductions only apply to workers in occupations where tipping is customary.
Preparing for Tax Filing Season
The IRS is currently updating income tax forms and instructions to help taxpayers claim these deductions during the upcoming filing season. Since existing forms like W-2s and 1099s remain unchanged for 2025, workers will need to calculate their eligible deductions using the methods outlined in the new guidance.
The agency noted that today’s guidance does not affect any rights or responsibilities regarding tips or overtime compensation under existing Fair Labor Standards Act provisions. Workers should continue following established protocols for reporting tips to employers and documenting overtime hours.