The IRS has released Notice 2025-69, which provides detailed guidance for workers claiming the new deductions for qualified tips and qualified overtime compensation for tax year 2025. These deductions were created under the One, Big, Beautiful Bill Act (OBBBA) and apply from 2025–2028.
Because 2025 tax forms (Form W-2, Form 1099-NEC, Form 1099-MISC, Form 1099-K) will not be updated to separately report tips and overtime, the IRS is allowing workers to use reasonable methods to calculate their allowable deductions this year.
This article summarizes the guidance and provides clear, practical examples to help employees, contractors, and businesses understand how to apply the new deductions for 2025.
- “No Tax on Tips” — What’s New for 2025
Overview
Workers in occupations that customarily receive tips may claim a deduction up to $25,000 per year (phasing out at $150,000 MAGI; $300,000 for joint filers).
Because employers are not required to separately report tips on 2025 forms, the IRS will accept several reasonable methods for calculating qualified tips.
How Employees Can Determine Qualified Tips
For 2025, employees may use any one of the following:
- Social Security tips in Box 7 of Form W-2
- Total tips reported to the employer on monthly Form 4070 reports
- Tips voluntarily reported by employer in Box 14 (if provided)
- Unreported tips included on Form 4137, line 4
Employees must still ensure that their occupation is one that customarily received tips as of December 31, 2024 (e.g., servers, bartenders, hairstylists, etc.). The IRS is providing transition relief on determining whether the employer’s business is a “specified service trade or business,” meaning most workers in tipped occupations can safely rely on the deduction for 2025.
Examples for 2025 (Employees)
(Based on IRS Notice 2025-69 n-25-69)
Example 1 — Server Using Box 7
Ann is a restaurant server. Her 2025 Form W-2 shows $18,000 in Box 7 (Social Security tips).
Deductible qualified tips: $18,000
Example 2 — Bartender With Reported and Unreported Tips
Bob reports $20,000 in tips to his employer on monthly Forms 4070.
His Form W-2 shows $15,000 in Box 7.
He also reports $4,000 in unreported tips on Form 4137.
Bob can choose either:
- $15,000 (Box 7) + $4,000 (Form 4137) = $19,000, or
- $20,000 (Forms 4070) + $4,000 = $24,000
Either method is acceptable.
Examples for 2025 (Self-Employed Workers)
Example 3 — Self-Employed Guide Using Tip Logs
Doug, a self-employed travel guide, receives $7,000 in tips included in a Form 1099-K showing $55,000 of total payments (tips not broken out).
Doug keeps daily tip logs, which substantiate the $7,000.
Deductible qualified tips: $7,000
For contractors: The 1099 alone will not identify tip amounts in 2025—you must rely on logs, receipts, or other documentation.
- “No Tax on Overtime” — What’s New for 2025
Workers eligible for Federal overtime under the Fair Labor Standards Act (FLSA) may deduct the “premium” portion of overtime wages—the extra half-rate that makes overtime “time-and-a-half.”
- Maximum deduction: $12,500 per filer (or $25,000 joint)
- Phases out starting at $150,000 MAGI ($300,000 joint)
Because 2025 W-2s and 1099s will not report qualified overtime separately, the IRS outlined reasonable methods for determining the deductible portion.
Reasonable Methods Workers Can Use for 2025
Method A: Use the Overtime Premium Listed on Pay Statements
If pay statements show the FLSA overtime premium separately (e.g., “overtime premium: $5,000”), use that amount.
Method B: If Only Total Overtime Is Shown (Premium + Regular Wages)
Use one-third of the total overtime amount.
Example: $15,000 total overtime → $15,000 ÷ 3 = $5,000 qualified overtime.
Method C/D: If Overtime Is Paid at Higher Rates (e.g., Double Time)
- Double time separately shown → divide by 2
- Double time total combined with wages → divide by 4
Method E: Adjustments for Bonuses
If nondiscretionary bonuses increase the regular rate, employees may reasonably adjust their calculations upward.
Method F: If No Year-End Statements Are Available
Employees may use:
- Regular rate from pay records
- Estimated hours worked over 40 per week
- Records requested from the employer
Method G: Non-Standard Overtime Rules (Law Enforcement, Fire, Public Sector)
Use the fractional method appropriate to the alternative overtime system for those that work in the public sector under FLSA (e.g. Law enforcement and firefighters).
Examples for 2025 (IRS-Based)
(All from Notice 2025-69 n-25-69)
Example 1 — Standard Overtime Premium Shown Separately
Andrew’s payroll statement shows $5,000 as the overtime premium.
Deductible qualified overtime: $5,000
Example 2 — Only Total Overtime Shown
Andrew’s statement instead shows $15,000 total overtime pay (regular + premium).
Qualified overtime: $15,000 ÷ 3 = $5,000
Example 3 — Double-Time Premium Shown Separately
Brad earns double time, with $10,000 shown as the overtime premium. Since double time premium is twice the half-rate portion:
Qualified overtime: $10,000 ÷ 2 = $5,000
Example 4 — Double-Time Shown Only as Total
Brad’s statement shows $20,000 in total double-time hours.
Qualified overtime: $20,000 ÷ 4 = $5,000
Example 5 — Law Enforcement Using 14-Day Work Period
Carol receives $15,000 of overtime under the 207(k) system.
Qualified overtime: $15,000 ÷ 3 = $5,000
Example 6 — Public Sector Compensatory Time
Diane receives $4,500 in compensatory-time cash-outs.
Qualified overtime: $4,500 ÷ 3 = $1,500
Key Takeaways for Employers and Workers
- 2025 is a transition year—workers must use existing forms plus supplemental documentation.
- Employers are not required to break out tips or overtime on 2025 forms.
- Workers should maintain logs, pay statements, POS records, or other documentation.
- Married workers must file jointly to claim either deduction.
- Deductions are available whether or not a taxpayer itemizes.
If you have questions about applying these rules or how the deductions impact your 2025 tax return, please contact your Hawkins Ash tax professional.
