IRS Notice 2025-69 Provides Guidance on Tip and Overtime Deductions for 2025
The IRS has issued new guidance clarifying how workers may calculate tax deductions for qualified tips and qualified overtime compensation for the 2025 tax year. Workers now have additional clarity on how to determine the amount of their tax deduction for qualified tips and qualified overtime compensation when separate accounting is not provided by their employer, as outlined in IRS Notice 2025-69. This guidance follows the IRS’s prior announcement that it would not penalize employers for failing to provide separate accounting for these amounts during the 2025 tax year.
As part of the phased implementation of the One Big Beautiful Bill Act (OBBBA), there will be no changes to the 2025 Form W-2, Form 1099-NEC, Form 1099-MISC, or Form 1099-K. Employers and other payors are not required to separately report cash tips or qualified overtime compensation on these forms or on the copies furnished to individuals for 2025. Because this information will not be included on tax forms, Notice 2025-69 provides guidance on how individual taxpayers may determine the amount of qualified tips and qualified overtime compensation eligible for the deduction. The Notice also provides transition relief related to the requirement that qualified tips must not be received in the course of a specified service trade or business.
The IRS confirms that workers may use “reasonable methods” to calculate these deduction amounts when separate employer reporting is unavailable. This builds on earlier employer-focused guidance in Notice 2025-62.
Guidance for Workers
For the 2025 tax year, Forms W-2 and 1099 will not include new boxes to separately report qualified tips or qualified overtime pay. As a result, workers may rely on reasonable calculation methods and existing records to determine the deductible amounts.
To calculate qualified tips, workers may use documentation such as the Social Security tips reported in Form W-2, Box 7, personal tip logs, amounts reported on Form 4137, or tips their employer voluntarily includes in Form W-2, Box 14 or on a separate written statement. For 2025, the transition rule allows employees who worked in occupations that customarily received tips before 2025 to generally treat those tips as eligible for the deduction, even without separate employer reporting.
To determine qualified overtime compensation, workers should note that only the premium portion of overtime pay required under the Fair Labor Standards Act (FLSA) qualifies for the deduction. Any compensation exceeding the FLSA-required premium does not qualify. When employers do not provide separate accounting, workers may use earnings statements and IRS-approved methods, such as relying on a separately identified overtime premium if available, or treating one-third of a total overtime amount as the FLSA-required premium when a single total overtime figure is shown. The IRS also permits using fractional multipliers to isolate the premium portion when higher overtime rates, such as double time, apply.
Employer Reporting
Although employers will not be penalized for failing to provide separate reporting for qualified tips or overtime compensation in 2025, the IRS encourages voluntary reporting, such as including this information in Form W-2, Box 14 or on a separate statement. Mandatory reporting is expected to begin with the 2026 tax year. Workers should maintain thorough records supporting the documentation and methods used to calculate their deductions. This Notice does not affect any rights or responsibilities related to tips or overtime compensation under the Fair Labor Standards Act of 1938 (FLSA). Additional information is available on the IRS website.
Questions?
The Warady & Davis LLP team is here to help you navigate these IRS updates and understand how the guidance in Notice 2025-69 may impact your tax situation. If you have questions about qualified tip or overtime deductions, year-end planning, or how these provisions apply to your specific circumstances, please contact your W&D advisor at (847) 267-9600 or [email protected] for assistance.