Tips are deductible in 2025—but may require some math.
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The IRS has released new guidance to help taxpayers who eligible to claim the deduction for tips and for overtime compensation for tax year 2025.
(The guidance to help employers and other payers navigate reporting requirements for cash tips and qualified overtime compensation under the One Big Beautiful Bill Act, or OBBBA, can be found here.)
The guidance clarifies how to figure your deduction without a separate accounting from your employer for cash tips or qualified overtime on information returns (such as Form W-2 or Form 1099). It also provides transition relief if you are a worker who receives tips in the course of a specified service trade or business (like a lawyer or a doctor).
What Is No Tax On Tips?
Under OBBBA, tip income is temporarily deductible—only for tax years 2025 through 2028—for taxpayers in traditionally and customarily tipped industries, regardless of whether they itemize.
The new deduction is available to taxpayers who receive qualified tips in occupations listed by the IRS as customarily and regularly receiving tips on or before December 31, 2024 (you can see the draft list from Treasury here and you can read more about the proposed Regs here). Qualified tips are voluntary cash or charged tips (meaning those made by credit card) received from customers or through tip sharing.
The maximum annual deduction is $25,000, and the deduction for self-employed taxpayers may not exceed the net income before the deduction from or business in which the tips were earned.
You must include your Social Security Number on the return and file jointly if married to claim the deduction. The deduction phases out with modified adjusted gross income over $150,000 ($300,000 for joint filers).
The deduction applies to employees and self-employed individuals, and qualified tips must be reported on Form W-2, Form 1099, or other specified statement furnished to the taxpayer or reported directly on Form 4137 (Social Security and Medicare Tax On Unreported Tip Income). Self-employed taxpayers in a Specified Service Trade or Business (SSTB) under section 199A are not eligible—the same is true for employees whose employer is in an SSTB. An SSTB is generally defined as a business whose success depends on the expertise, judgment, or reputation of the owner. Examples include doctors, lawyers, CPAs, bookkeepers, enrolled agents, tax preparers and financial advisors.
The IRS estimates that there are about six million workers who report tipped wages (it will be interesting to see how much this number moves beginning in 2025).
What Are The New Reporting Requirements For No Tax On Tips?
Certain employees and self-employed individuals who receive qualified tips may deduct those tips if they are reported on a Form W-2, Form 1099, or reported directly by the individual on Form 4137. Generally, employers and other payers must file those information returns with the IRS, and provide statements to taxpayers showing cash tips received during the year and the tip recipient’s occupation.
However, because employers are not required to separately report qualified tips on Forms W-2 for tax year 2025, employees may rely on other information. You can simply use the amount of Social Security tips reported in Box 7 of Form W-2, or rely on all tips reported to their employer on Forms 4070. If an employer voluntarily reports tip totals elsewhere on Form W-2 or on a separate statement, you may use that instead. The IRS has clarified that workers using any of these methods do not need a special breakdown from their employer.
Self-employed individuals who receive tips are handled similarly. Because third-party payment platforms (like PayPal) will not separately identify tips on Forms 1099-K for 2025, self-employed workers may rely on contemporaneous records like tip logs.
And, in what can only be described as a head scratcher, for the tip deduction, transition relief applies to the SSTB exclusion for 2025 meaning the IRS will treat tips as qualified even if they might otherwise be excluded, until the regulations are finalized. According to the guidance, the Treasury intends to issue proposed regulations and solicit public comment on these issues before publishing final regulations.
No Tax On Tips Reporting Examples
To help taxpayers figure the deduction, the IRS provided some examples.
Waiter with reported tips in box 7, Form W-2
Ann works as a server and her W-2 shows $18,000 in Social Security tips on Form W-2, box 7 for 2025. She didn’t have anything extra to report on Form 4137 (Social Security and Medicare Tax on Unreported Tip Income), so she doesn’t need to overthink it. She can use the $18,000 straight off her W-2 and use that as her qualified tips for the deduction.
Bartender with additional reported tips on Form 4137
In 2025, Bob, who is a bartender, reports $200,000 in tips to his employer using Form 4070 (Employee’s Report of Tips to Employer) and $4,000 of unreported tips on Form 4137, line 4. His Form W-2 shows $200,000 in box 1 and $15,000 in box 7. The IRS basically gives Bob a choice: he can use the $15,000 from Box 7, or he can use the $20,000 he reported directly to his employer. Either way, he also gets to add the $4,000 from Form 4137 to determine the amount of qualified tips.
Self-employed travel guide
Doug is a self-employed travel guide who operates as a sole proprietor. In 2025, Doug receives $7,000 in tips from customers paid through a third-party settlement organization. For tax year 2025, Doug receives a Form 1099-K from the TPSO showing $55,000 of total payments, but none of it is labeled as tips. However, Doug clearly listened to his tax professional and kept a log of each tour that shows the date, customer, and tip amount received. Because Doug has daily tip logs substantiating the $7,000 tip amount, he may use the $7,000 tip amount in determining qualified tips for tax year 2025.
What Is No Tax On Overtime?
Workers who receive overtime will be eligible for a deduction for qualified overtime pay of $12,500 ($25,000 for married taxpayers filing jointly). The definitions of overtime workers and overtime pay are generally tied to the Fair Labor Standards Act, of FLSA (more on that in a moment).
As with tips, this is a deduction, not an exclusion.
The new deduction is effective for 2025 through 2028 for taxpayers who receive qualified overtime compensation—it can be claimed regardless of whether you itemize your deductions. The deductible amount is the bit that exceeds your regular rate of pay by law—the “half” portion of “time-and-a-half” compensation. The guidance clarifies that while the additional half required by the FLSA may be qualified overtime, payments in excess of the FLSA-required premium are not. That means that only the half is deductible, even if your overtime rate is two or three (or more) times your normal rate.
Overtime pay must generally be reported on a Form W-2, Form 1099, or another statement furnished to the taxpayer (there’s an exception for 2025). On the taxpayer side, you must include your Social Security Number on the return and file jointly if married to claim the deduction. The deduction phases out for taxpayers with modified adjusted gross income (MAGI) over $150,000 ($300,000 for joint filers).
Meaningfully, the overtime rules are dependent on eligibility for federal overtime—an FLSA eligible employee. If you are FLSA-ineligible, but are paid for overtime under state or local law or for another reason, it is not considered qualified overtime compensation for purposes of the deduction, no matter the circumstances. In other words: federal law controls.
What Are The New Reporting Requirements For No Tax On Overtime?
If you receive qualified overtime compensation, you may be able deduct the qualified overtime compensation that is reported on a Form W-2 or Form 1099. Again, employers and other payers are normally required to file information returns with the IRS or the SSA, as applicable, and to provide statements to taxpayers showing the total amount of qualified overtime compensation paid during the year.
However, for the 2025 tax year, because separate accounting may not appear on W-2 or 1099 etc., you may use “reasonable methods” like relying on pay stubs and employer documents to determine the overtime portion. You may still have to do some math.
No Tax On Overtime Reporting Examples
Generally, the FLSA requires that most employees in the United States be paid at least the federal minimum wage for all hours worked and overtime pay at not less than time and one-half their regular rate of pay for all hours worked over 40 in a workweek. However, the law provides for certain exemptions. Here’s a look at some examples provided by the IRS:
Overtime premiums clearly reported on a payroll statement
Andrew works overtime during 2025, and he receives a payroll statement from his employer that shows $5,000 as the “overtime premium” that he was paid during 2025. That’s pretty straightforward. His pay records show he got $5,000 in actual overtime premium pay for 2025, so that full $5,000 counts toward his qualified overtime deduction.
Overtime premiums clearly not reported on a payroll statement
Now use the same facts, but imagine Andrew’s pay stub isn’t so tidy. Instead of breaking out the premium, it just shows $15,000 in total overtime pay (a mix of his regular wages plus the extra time and a half required by law). This requires a little math—just divide the total by three, which once again gives him a $5,000 overtime premium to deduct. Remember that only the premium (the “half”) is deductible.
Overtime premiums that exceed time-and-a-half
That’s a normal overtime scenario, but what if your employer is even more generous? Brad’s employer has a practice of paying overtime at doubletime (a rate of two times the regular rate of pay). Brad was paid $20,000 in overtime pay during 2025. Brad’s last pay stub for 2025 shows “overtime” of $20,000 paid in 2025. The math here is to divide by four, which means Brad can claim $5,000 as his qualified overtime amount. Again, only the premium (the “half”) is deductible.
FLSA-Eligible work weeks with quirky rules
Carol works in law enforcement under a special FLSA “work period” system. She earns $15,000 in overtime pay over a 14-day cycle. Even with that schedule, the rule works the same as it would with a normal overtime scenario: divide by three, and she ends up with $5,000 in deductible overtime premium.
Comp time as overtime
Finally, there’s Diane, who works for a state or local government that uses compensatory time instead of paying overtime directly. For every hour of overtime she works, Diane gets an hour and a half of paid time off. In 2025, she cashes out $4,500 worth of this comp time. Since that amount covers both her regular pay and the premium portion, she counts one-third of it ($1,500) as her qualified overtime compensation.
No Double-Dipping
And in case you’re feeling creative, the definition of qualified overtime compensation does not include any qualified tips. So, no double-dipping on deductions.
Only For the Current Year
Remember that this information is only applicable for the 2025 tax year. That’s because there were no changes to Form W-2 for the tax year 2025, even though some of the new provisions, including those new, temporary deductions, take effect in 2025. The IRS has previously said that the omissions are “intended to avoid disruptions during the tax filing season and to give the IRS, business and tax professionals enough time to implement the changes effectively.”
The 2026 tax year will look very different. Expect new Forms W-2 and new withholding tables (you can get a look at the new Form W-2 here).
Where Can I Find The Guidance?
Notice 2025-69 provides guidance to individual taxpayers who are eligible for a federal income tax deductions for qualified tips or qualified overtime compensation for tax year 2025.
What’s Next For Taxpayers?
The deductions for tips and overtime are two of four new deductions under OBBBA that are largely referred to by the administration by their popular monikers: No Tax on Tips, No Tax on Overtime, No Tax on Car Loan Interest, and No Tax on Social Security.
You’ll report the deduction (or deductions) alongside those other OBBBA deductions on a new Schedule 1-A, Additional Deductions, when you file your 2025 tax return in 2026. The final version of Schedule 1-A hasn’t been released yet, but you can take a look at the draft version here. The IRS says that it is in the process of updating income tax forms and instructions for taxpayers to use this filing season to claim these deductions.
There’s more information to come on OBBBA, so check back with Forbes. To keep it easy, I recommend that you subscribe to our free tax newsletter—that way, the information you need will land in your email inbox each Saturday morning.
Source: https://www.forbes.com/sites/kellyphillipserb/2025/11/21/irs-explains-how-you-can-claim-your-2025-tips-and-overtime-deductions/
