Labor & Employment Law Daily Wrap Up, IRS NEWS—Treasury, IRS issue guidance for workers eligible to claim deduction for tips and overtime for 2025 tax year, (Nov 21, 2025)

By Brandi O. Brown, J.D.

The guidance also offers illustrative examples of scenarios employees might encounter.

Under the One, Big, Beautiful Bill, a release issued by the IRS explains, workers may be eligible for new deductions for tax years 2025 through 2028 if they received qualified tips. For tipped workers, the maximum annual deduction is $25,000, which phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers). Additionally, for tax years 2025 through 2028, individuals who receive qualified overtime compensation may deduct the pay that exceeds their regular rate of pay (generally, the “half” portion of “time-and-a-half” compensation) that is required by the Fair Labor Standards Act and reported on a Form W-2, Form 1099, or other specified statement furnished to the individual, with maximum annual deductions and deduction phase outs.

Guidance. Thus, in Notice 2025-69, issued today, the IRS and Treasury Department offer information for workers on how to determine the amount of their deduction without receiving a separate accounting from their employer for cash tips or qualified overtime on information returns such as Form W-2 or Form 1099, since those forms remain unchanged for the current tax year.

“Transition relief.” It also provides transition relief to workers who receive tips in the course of a specified service trade or business in the form of a transition period. “Specifically,” the guidance indicates, “until January 1 of the first calendar year following the issuance of final regulations regarding the determination of whether a trade or business is a specified service trade or business for purposes of section 224 and associated employer information reporting, the IRS will treat the employee as having received tips in the course of a trade or business that is not a specified service trade or business if the employee is in an occupation that customarily and regularly received tips on or before December 31, 2024, as provided by the Secretary.”

The agencies indicate that they intend to issue proposed regulations and solicit public comment on these issues before publishing final regulations. The IRS also is in the process of updating income tax forms and instructions for taxpayers to use this filing season that will assist them in claiming these deductions.

Examples. The guidance provides examples to illustrate various situations tipped employees might encounter, offering examples that include (1) a waiter with reported tips in box 7 of their W-2, (2) a bartender with additional reported tips on Form 4137, and (3) a self-employed travel guide who, although the Form 1099-K does not separately identify tips, keeps a log of tours showing the date, customer, and tip amount received.

Regarding taxes on overtime, the guidance provides a series of examples as well.

News: AgencyNews WageHour Overtime EconomicNews