New IRS Guidance for Workers Claiming Tip and Overtime Deductions for 2025

The IRS has released Notice 2025-69, offering long-awaited instructions for workers who plan to claim the new deductions for qualified tips or qualified overtime compensation on their 2025 tax returns. These deductions, created by the One, Big, Beautiful Bill Act (OBBBA), apply for tax years 2025 through 2028 and are expected to benefit millions of workers in service industries, hospitality, retail, transportation, and shift-based occupations.

This new guidance is essential because 2025 reporting forms (W-2, 1099-NEC, 1099-MISC, 1099-K) will not include separate tip or overtime reporting yet. Workers must rely on their own records to calculate the deductions. Notice 2025-69 explains how to do that correctly, offers transition relief, and includes multiple examples to help taxpayers determine what qualifies.

Here is a look at the new deductions, who qualifies, and what workers and tax pros should keep in mind for the 2025 filing season.

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1. The New "No Tax on Tips" Deduction (Up to $25,000)

Beginning in 2025, workers in occupations that customilarly and regularly received tips on or before December 31, 2024 may deduct up to $25,000 of qualified tips per year.

Who qualifies?

Workers who receive "cash tips," including:

• Tips paid in cash

• Tips paid on credit cards

• Tips received through tip-sharing arrangements

• Tips reported on Form W-2 or Form 4137

What counts as a qualified tip?

A tip may be deducted if:

• It was voluntarily paid by the customer

• It was included in your W-2 (box 7) or reported on Form 4137

• You work in an occupation that received tips before 12/31/24

• You are not receiving the tip as part of a specified service trade or business (temporary transition relief applies)

Key income limits

The deduction phases out when:

• MAGI exceeds $150,000 (single)

• MAGI exceeds $300,000 (married filing jointly)

Married taxpayers must file jointly to claim the deduction.

How to calculate your qualified tips for 2025

Because W-2s will not include a separate box for qualified tips until 2026, employees may use:

• Box 7 of the W-2 (social security tips)

• Total tips reported to employer using Form 4070

• Tips listed in Box 14 of the W-2 (if employer provides it)

• Form 4137, line 4 (unreported tips self-reported)

The IRS allows these methods because 2025 is a transition year.

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2. The New "No Tax on Overtime" Deduction (Up to $12,500)

For eligible workers, the IRS now allows a deduction for the overtime premium portion of overtime pay, generally the "half" in "time-and-a-half."

Maximum deduction

• Up to $12,500 for single filers

• Up to $25,000 for joint filers

Who qualifies?

Workers must:

• Be covered by the Fair Labor Standards Act (FLSA)

• Be non-exempt from overtime rules

• Have overtime that is required under federal law

Income limits

The overtime deduction phases out when:

• MAGI exceeds $150,000 (single)

• MAGI exceeds $300,000 (joint)

How to calculate qualified overtime

Since employers won't separately report qualified overtime until 2026, workers may rely on:

• Pay stubs

• Annual earnings summaries

• Employer-provided hours and rate statements

• Timekeeping records

The IRS lists several reasonable calculation methods, including:

• Using the exact overtime premium from pay statements

• Using one-third of total overtime wages when the premium portion is not broken out

• Adjusting for premium rates higher than 1.5×

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3. No Updated Forms for 2025, Workers Must Use Records

Because 2025 forms will not include separate reporting boxes for tips or overtime:

• W-2, 1099-NEC, 1099-MISC, and 1099-K forms will not change

• Workers must track amounts themselves using logs and pay records

• Employers may voluntarily disclose tip or overtime details in Box 14, but are not required

Strong recordkeeping will be essential for correct filing.

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4. Transition Relief for 2025

To ease the first year of implementation, the IRS provides transition relief:

• Workers will be treated as eligible even if their employer operates a specified service trade or business

• Self-employed workers receiving tips may rely on POS logs or third-party data

• Occupation-level reporting won't be required until 2026

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5. What Tax Professionals Should Watch For

• Millions of tipped workers may now qualify for a deduction up to $25,000

• Many hourly workers will be eligible for a deduction up to $12,500 for overtime

• Both deductions phase out at moderate income levels, requiring careful MAGI review

• Married filing separately? No deduction allowed

• Audit risk will center on documentation quality

Tax preparers should expect significantly more clients asking how to calculate tip and overtime deductions during the 2025 filing season.

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How Margen Helps You Navigate Tip and Overtime Deductions

The new tip and overtime deduction rules affect millions of workers and introduce complex calculations, phase-outs, and documentation requirements. Margen helps you apply the rules to your specific situation by answering questions like:

"How do I calculate my qualified tips if my W-2 doesn't list them separately?"

"How much of my overtime premium qualifies for the deduction?"

"Do I fall into the phase-out range based on my MAGI?"

"Can I claim both the tip deduction and the overtime deduction this year?"

Margen evaluates your income, pay records, and tip/overtime amounts using the latest IRS guidance, so you can claim every dollar you're entitled to, confidently and accurately.

For full details, see IRS Notice 2025-69.