IRS explains how to claim 2025 tips and overtime deductions

The IRS issued guidance explaining how workers can claim 2025 deductions for tips and overtime, clarifying how to calculate the amounts even though current W-2 and 1099 forms won’t show separate lines this year. The move matters for millions of hourly and service workers now eligible for new deductions created under this year’s tax law.

What Happened

On November 21, 2025, the Treasury Department and IRS published Notice 2025-69, outlining how employees and self‑employed workers should figure the deductions for the 2025 tax year. Because 2025 information returns remain unchanged, the agency says workers can rely on existing records—such as Social Security tips reported in Box 7 of Form W‑2, tips reported to employers on Forms 4070, and any unreported tips added via Form 4137—to determine deductible tip amounts. The guidance also offers transition relief for certain workers in specified service trades and businesses while regulators finalize detailed rules.

How The Deductions Work

For tips, eligible workers may deduct up to $25,000 per year for tax years 2025 through 2028, subject to income limits that begin phasing out above $150,000 for single filers (and $300,000 for joint filers). Qualifying tips include voluntary cash or charged tips and amounts received through tip pools, so long as they’re properly reported. Tips deduction capped at $25,000 through 2028.

For overtime, individuals may deduct the portion of overtime pay that exceeds their regular rate of pay—the “half” in time‑and‑a‑half required by the Fair Labor Standards Act. The maximum annual deduction is $12,500 for single filers or $25,000 for joint filers, with the same income phaseouts. Payments above the FLSA‑required premium don’t qualify, and overtime that’s not covered by federal FLSA rules generally isn’t eligible. Only FLSA overtime premium is deductible.

What To Do Now

Keep contemporaneous records. If your employer doesn’t separately list tips or the FLSA overtime premium on year‑end forms (they’re not required to for 2025), you can use W‑2 Box 7, Forms 4070, Form 4137 entries, or pay stubs that show the FLSA overtime premium to compute your deduction. The IRS has also provided examples showing how to derive the deductible amount when a pay stub lists only a total “overtime” figure.

The agency previously announced transition penalty relief for employers on new tip and overtime reporting rules for 2025, acknowledging many payroll systems need time to catch up. As rulemaking continues, the IRS says it will keep updating instructions for filing 2025 returns in 2026. Phaseouts start at $150,000 ($300,000 joint), so check your income and filing status before claiming the deductions.

Sources

• Treasury, IRS provide guidance for individuals who received tips or overtime during tax year 2025 — IRS (November 21, 2025)
• Treasury, IRS provide penalty relief for tax year 2025 for information reporting on tips and overtime under the One, Big, Beautiful Bill — IRS (November 5, 2025)
• IRS Loosens Rules for Workers to Claim 'No Tax on Tips' Deductions — Wall Street Journal (November 21, 2025)
• IRS Explains How You Can Claim Your 2025 Tips And Overtime Deductions — Forbes (November 21, 2025)