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IRS issues new guidance on ‘No Tax on Tips’ and overtime: Here are the details
US Department of the Treasury and the Internal Revenue Service (IRS) released guidance to claim new tax deductions on tips and overtime compensation for 2025.
The US Department of the Treasury and the Internal Revenue Service (IRS) on November 21, published a detailed guidance for workers eligible to claim new tax deductions on tips and overtime compensation for the 2025 tax year under the One Big Beautiful Bill Act (OBBBA).
Here’s a breakdown of what the guidance means for employees and what steps they should take ahead of the next tax filing season.
Also read: Will there be new IRS stimulus payment in November 2025? what you need to know
Deduction for qualified tips
Qualified tips” include voluntary cash or card tips (not forced service charges), even if they were not separately reported by the employer.
Workers in traditionally tipped occupations can deduct up to $25,000 of “qualified tips” for the tax year 2025.
The deduction phases out for individuals with modified adjusted gross income (MAGI) above $150,000 (or $300,000 for joint filers).
For employees, the IRS guidance clarifies how to compute this deduction even if Form W-2 or 1099 does not separately list tips. Workers may rely on Social Security tips reported in Box 7 of W-2 or tips reported to an employer. Self-employed workers can rely on contemporaneous tip logs.
Deduction for qualified overtime compensation
The IRS defines “qualified overtime” as the portion of overtime that exceeds the regular rate of pay, generally the "half-time premium."
For 2025, the maximum overtime deduction is $12,500 (or $25,000 for joint filers). This deduction is available to both non-itemizers and itemizers.
However, only overtime mandated under the U.S. Fair Labor Standards Act (FLSA) counts. Pay in excess of the legally required overtime rates does not qualify.
Also read: New IRS Schedule 1-A: Deductions for tips, overtime, car loans, and seniors
Rules and transition relief
The IRS is allowing “reasonable methods” to calculate your qualified tip or overtime amounts, as W-2 and 1099 forms have not been updated for 2025 to reflect the new deductions.
In a separate announcement, the IRS stated that it is waiving penalties for 2025 if employers fail to separately report cash tips or overtime on W-2 forms and other statements.
Employers are encouraged, though not required, to voluntarily furnish more detailed statements (e.g., via online portals or Box 14 of W-2) to help employees claim the deductions.
The IRS is updating its tax forms and instructions for the upcoming tax-filing season, including a new Schedule 1-A (Additional Deductions) for these and other OBBBA-related deductions.
The IRS stated that the final instructions for the same are still being drafted.
