New IRS Guidance on 2025 Tips & Overtime Deductions: What Employers Need to Know

The Internal Revenue Service (IRS) and the U.S. Department of the Treasury have released new guidance that will help many workers claim tax deductions for tips and overtime pay for the 2025 tax filing season.

Under the new law One, Big, Beautiful Bill Act (OBBBA), taxpayers who receive “qualified tips” or “qualified overtime compensation” may now be eligible for federal income tax deductions when they file their 2025 returns. The new deductions apply for tax years 2025 through 2028. These deductions potentially offer substantial savings for workers in tipped occupations (e.g. servers, hospitality workers, delivery drivers) and those who regularly work overtime, reducing taxable income and lowering the federal income tax liability.

Because 2025 is the first year for these deductions, there are some important caveats and transitional rules to be aware of:

• For 2025, the standard reporting forms (Form W-2, Form 1099-NEC, 1099-MISC or 1099-K) will not be updated to separately show “qualified tips” or “qualified overtime compensation.”
• Employers are not required (and will not face penalties) to provide separate accounting showing those amounts in 2025.
• Because of that, the IRS guidance (Notice 2025‑69) explains how eligible workers can still calculate and claim the deductions using reported wages and/or tips, pay stubs, other documentation, and reasonable estimation methods where needed.

Because this is a new deduction with special “transition-year” rules, applying it correctly may require careful review of pay records and potentially estimating amounts if an employer did not separately report tips or overtime compensation. If an individual is unsure how to proceed, we strongly recommend consulting a qualified tax professional.

For the full official guidance from the IRS, see the following documents:

• Notice 2025‑69 – Guidance for Individual Taxpayers Who Received Qualified Tips or Qualified Overtime Compensation in 2025
• News Release – The Treasury, IRS provide guidance for individuals who received tips or overtime during tax year 2025
• IRS Facts – One, Big Beautiful Bill Act: Tax deductions for working Americans and seniors

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* MPAY LLC dba Payentry (Company), is not a law firm. This article is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other Company materials does not create an attorney-client relationship. The Company is not responsible for any inadvertent errors that may occur in the publishing process.