On November 21, the Treasury Department and IRS issued guidance for workers eligible to claim deductions for tips and overtime under the One Big Beautiful Bill Act (OBBBA) for tax year 2025. Notice 2025-69 clarifies how employees can calculate deductions even if employers do not provide a separate accounting of cash tips or qualified overtime on Forms W-2 or 1099, which remain unchanged for 2025. The IRS is updating tax forms and instructions to assist employees in claiming these deductions.
Tips Deductions
Eligible tipped workers may deduct up to $25,000 per year, phased out for modified adjusted gross incomes above $150,000 ($300,000 for joint filers). Employees can rely on amounts reported in box 7 of Form W-2, on Form 4070 (tips reported to employers), or on Form 4137 (unreported tips). Self-employed individuals may use substantiated tip logs or third-party payment records, even if tips are included in a Form 1099-K without separate identification.
Overtime Deductions
Employees may deduct qualified overtime pay that exceeds their regular rate—typically the “half” portion of time-and-a-half pay required under the Fair Labor Standards Act (FLSA). Maximum deduction is $12,500 per individual ($25,000 for joint filers), with phase-out at the same income thresholds. Employees must meet FLSA eligibility; deductions apply to both itemizing and non-itemizing taxpayers.
IRS Penalty Relief and Voluntary Reporting
Notice 2025-62 provides relief for errors in filing or furnishing information returns or payee statements under the Internal Revenue Code (IRC 6721 and 6722). While reporting OBBBA tips or overtime is optional, businesses may voluntarily include amounts in box 14 of Form W-2, provide separate statements, or use secure portals.
Bottom Line for Employers
Voluntary reporting can streamline year-end payroll, reduce confusion, and help employees claim deductions correctly. By tracking FLSA status, keeping clear records of tips and overtime, and communicating proactively, employers can minimize errors and support workers as these new 2025 deductions roll out.
