New Tax Breaks on Tips and Overtime for 2025: IRS and Treasury Issue Guidance 177

 in IRS News  tagged IRS / overtime / tips / Treasury by (updated 21 days ago)

The Department of the Treasury and the Internal Revenue Service (IRS) have issued Notice 2025-69 to clarify new tax deductions available to workers for qualified tips and qualified overtime compensation for tax years 2025 through 2028. These new deductions stem from the One, Big, Beautiful Bill.

💰 Tax Deductions for Qualified Tips

Workers who receive tips may be eligible for a significant deduction, essentially making a portion of their tips tax-free.

  • Maximum Deduction: The annual deduction is capped at $25,000.

  • Phase-Out: The deduction gradually disappears (phases out) for taxpayers with a modified adjusted gross income (MAGI) exceeding $150,000 (or $300,000 for married couples filing jointly).

  • Scope: This affects an estimated 6 million workers who report tipped wages.

How to Calculate Your Qualified Tips

The guidance clarifies that workers can claim the deduction even though employers’ information returns (like Form W-2 or 1099) haven’t been updated to separately account for this amount.

Worker Type Tip Reporting Scenario Amount Eligible for Deduction
Waiter (Ann) $18,000 in social security tips reported in Box 7, Form W-2. No other tips reported. $18,000 (the amount in Box 7)
Bartender (Bob) Reported $20,000 to employer on Form 4070. W-2, Box 7 shows $15,000. Also reported $4,000 of unreported tips on Form 4137. $15,000 (W-2 Box 7) OR $20,000 (reported on Form 4070), PLUS the $4,000 from Form 4137.
Self-Employed Guide (Doug) Received $7,000 in tips via a third-party payment organization (TPSO) that sent a Form 1099-K. Kept daily tip logs. $7,000 (based on tip logs, as the 1099-K did not separate tips)

⏳ Tax Deductions for Qualified Overtime

Individuals who receive qualified overtime compensation can now deduct the portion of their pay that represents the overtime premium (generally, the “half” portion of “time-and-a-half” pay required by the Fair Labor Standards Act (FLSA)).

  • Maximum Deduction: The annual deduction is capped at $12,500 ($25,000 for joint filers).

  • Phase-Out: Similar to tips, the deduction phases out for taxpayers with a modified adjusted gross income (MAGI) over $150,000 ($300,000 for joint filers).

  • Availability: This deduction is available to both itemizing and non-itemizing taxpayers.

Identifying the Deductible Overtime Amount

The deduction is generally limited to the FLSA-required overtime premium.

Worker (Andrew) Example Overtime Pay Details Deductible Qualified Overtime Amount
Scenario 1 Payroll statement separately shows $5,000 as the “overtime premium” paid in 2025. $5,000 (The exact premium amount).
Scenario 2 Payroll statement shows a total “overtime” amount of $15,000 (premium + regular wages portion). $5,000 ($15,000 total overtime divided by 3, which isolates the premium: $15,000 / 3 = $5,000).
Employer Paid Double Time (Brad) Paid $20,000 in overtime at a rate of two times the regular rate (“double time”). $5,000 ($20,000 divided by 4, as the FLSA only requires time and a half, so only one-fourth of the total double-time pay is the required premium).
Compensatory Time Off (Diane) Received $4,500 in wages for compensatory time off, calculated at time-and-a-half. $1,500 ($4,500 divided by 3, which is one-third of the wages).

📝 Key Takeaways for the 2025 Filing Season

  • The IRS is updating tax forms and instructions to help taxpayers claim these deductions.

  • The guidance, Notice 2025-69, provides transition relief and helps workers calculate their deduction without needing updated W-2 or 1099 forms from their employers this year.

  • These new tax rules do not change any employer or employee rights or responsibilities under the Fair Labor Standards Act (FLSA) regarding how tips or overtime must be paid.

Do you have any specific questions about how your personal income or filing status might be affected by these new deductions?

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