No Tax On Tips Or Overtime: What Taxpayers Need To Know

As a result of the passage of the One, Big, Beautiful Bill Act (OBBBA), 2025 marked a major shift in how millions of American workers report their income and claim deductions. For the first time, tipped workers and overtime earners may receive significant new deductions, even if their employers aren't yet required to separately track or report those amounts on Forms W-2 or 1099.

To help taxpayers navigate these new rules, the Internal Revenue Service (IRS) released Notice 2025-69 as detailed guidance to explain who qualifies, how to calculate deductions, and what records workers need to keep. This guidance will prove to be especially helpful this filing season, as 2025 was the transition year before updated tax forms arrive.

Below is a breakdown of what workers claiming deductions for taxes on tips or overtime should know as we enter the 2025 tax season:

1. The New "No Tax on Tips" Deduction

For tax years 2025 through 2028, workers who receive qualifying tips may deduct up to $25,000 per year, though this phases out for taxpayers whose modified AGI (MAGI) is above $150k ($300k for joint filers). The IRS estimates that roughly 6 million U.S. workers report tipped wages, meaning this deduction could put thousands of dollars back into the pockets of servers, bartenders, stylists, delivery drivers, tour guides, and more.

But what counts as "qualified tips"? According to the IRS, to count as "qualified tips," the following criteria must be met:

1. The tips must be cash or charged tips received in an occupation that customarily and regularly received tips before December 31, 2024;
2. Tips must be paid voluntarily, not mandatory service charges;
3. Tips must be properly reported on tax forms; and
4. Tips cannot be earned while working in a specified service trade or business (SSTB), but the IRS is granting transitional relief on this rule until final regulations have been published.

So, what if your W-2 doesn't list tips separately, as required by the IRS? Thankfully, for 2025, W-2s and 1099s will not include the new tip-reporting boxes yet. This means the IRS is allowing workers to determine qualified tips by using W-2 Box 7, total tips reported to employers on Form 4070, or employer-provided Box 14 amounts. Workers only need to use one of these methods, plus any additional unreported tips claimed through Form 4137.

2. The New "No Tax on Overtime" Deduction

For tax years 2025-2028, workers can also deduct qualified overtime compensation. The IRS has defined "overtime compensation" as the portion of overtime pay that exceeds an employee's regular rate, which is typically the "half" in "time and a half." These deductions will also experience limits, capping at $12,500 per year per taxpayer, $25,000 for married joint filers, and phases out at MAGI above $150,000 ($300,000 for joint filers).

Only workers who are covered by the Fair Labor Standards Act (FLSA) and not exempt from overtime rules qualify for the "No Tax on Overtime" deduction. This means executives, certain professionals, outside salespeople, and others exempt from the FLSA overtime rules will not qualify for the deduction.

As for what counts as "qualified overtime," only the overtime that is required by the federal FLSA qualifies. Any extra overtime voluntarily provided by the employer (holiday pay, double-time, etc.) does not count.

In order to calculate the amount of qualified overtime in 2025, as the updated W-2s have not yet been released, workers will need to rely on their paystubs, year-end payroll summaries, and/or statements showing the overtime premium portion of wages.

Aside from the requirements listed above, both deductions require that married couples be filing jointly to claim either. The IRS also highlights the importance of recordkeeping, as the burden will fall on the employees or contractors to maintain paystubs, logs, statements, daily tip records, or any other documentation that can support claimed amounts.

These new deductions are designed to provide relief to millions of workers in fields where tips and overtime are common but often underreported or heavily taxed, such as service industries, hospitality, tourism, transportation, retail, healthcare, and public safety. While this transition year still requires workers to gather their own financial records and calculate their eligible amounts, the IRS had made it clear that if you can substantiate your tips or overtime premium, you can deduct it.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.