On November 21, the Internal Revenue Service (IRS) and the Department of Treasury published additional guidance to assist taxpayers planning to claim a deduction for qualified tips or qualified overtime compensation for tax year 2025. In Notice 2025-69, illustrative examples are provided to assist taxpayers with claiming the above-the-line deductions.

The One Big Beautiful Bill Act’s (OBBBA) “No Tax on Tips” deduction is allowed for up to $25,000 in tips in years 2025 through 2028. The deduction is phased out for single individuals with income over $150,000 and joint filers who earn over $300,000. A taxpayer will lose $100 of the exclusion for each $1,000 over the excess amount.

OBBBA’s qualified overtime exclusion is allowed for up to $12,500 ($25,000 for joint filers), in years 2025 through 2028. The overtime exclusion applies to taxpayers with modified adjusted gross income of up to $150,000 ($300,000 for a joint return). There are phaseouts on the deduction above those levels. The overtime pay must be in excess of the normal full-time pay rate. If an employee earns $18 per hour and is paid $27 per hour for overtime, only $9 per hour for overtime pay is deductible.

The IRS is developing updated forms and instructions to assist with these new laws. There are approximately 6 million taxpayers who report tipped wages. The guidance focuses on how individual taxpayers can determine the eligible amount for qualified tips and eligible overtime compensation.

The “No Tax on Tips” guidance included the following:

• Employees: Use the total Social Security tips reported in Box 7 of their W-2 along with tips reported on Form 4070, and unreported tips from Form 4137.
• Non-employees: May use tips reported on 1099-NEC, 1099-MISC or documented logs.
• Transitional Relief for Specified Service Trade or Business (SSTB): Employees who customarily received tips in the course of employment in specified trades or businesses may rely on transitional relief. Until January 1 of the first calendar year following the issuance of final regulations, these taxpayers may treat their occupation as not an SSTB if it meets the occupation test.

For qualified overtime compensation, an inquiry into whether the employee is covered by the Fair Labor Standards Act of 1938 (FLSA) and is nonexempt must first be undertaken since certain individuals are exempt from overtime compensation requirements. If the taxpayer is not covered by FLSA, the overtime compensation is not qualified and cannot be deducted.

If the taxpayer does not receive a separate statement in 2025 showing overtime compensation, there are four options to determine the deductible amount:

• If overtime was paid at 1.5 times the regular rate and the premium is separately stated, use that amount.
• If overtime was paid at 1.5 times the regular rate, but the premium is not separately stated, an approximate fraction of one-third the aggregate dollar amount may be used.
• If overtime is paid at higher rate, for example double the individual’s regular rate, then the fraction would be one-half. The taxpayer will have to adjust the fraction according to how overtime is paid.
• If an individual is paid in excess of 1.5 times the regular rate, an adjusted appropriate fraction should be used based on a reasonable method from the information requested from and supplied by the employer.