IRS Issues Comprehensive Guidance on New Deductions for Tips and Overtime: Key Takeaways from Notice 2025-69

The Department of the Treasury and the Internal Revenue Service recently released Notice 2025-69, which provides significant administrative guidance on two new federal income tax deductions for “qualified tips” and “qualified overtime compensation.” These provisions were enacted as part of the One, Big, Beautiful Bill Act (OBBBA), Pub. L. 119-21 (2025), and they apply to tax years beginning after December 31, 2024 and before January 1, 2029. Because the revised information-reporting forms required to support these deductions will not be in use for tax year 2025, Notice 2025-69 establishes transition rules that allow taxpayers to substantiate their eligible amounts using alternative documentation and reasonable calculation methods.

New Internal Revenue Code § 224 allows individuals to deduct up to $25,000 per year in qualified tips, subject to modified adjusted gross income phase-outs beginning at $150,000 for single filers and $300,000 for joint filers. “Qualified tips” include cash or charged tips voluntarily paid by customers in occupations that customarily received tips before the end of 2024, provided that such tips are not received in a specified service trade or business (SSTB) unless transition relief applies. Mandatory service charges and other involuntary fees do not qualify. Internal Revenue Code § 225 similarly allows taxpayers to deduct qualified overtime compensation, up to $12,500 for single filers or $25,000 for joint filers. Only the premium portion of overtime required under the Fair Labor Standards Act (FLSA), 29 U.S.C. § 207, qualifies for the deduction; voluntary or enhanced overtime premiums do not. Neither deduction is available to married filing separately taxpayers, and each requires that the taxpayer provide a valid Social Security number.

Congress intended for employers, gig platforms, and other payors to begin separately reporting cash tips, occupations, and qualified overtime beginning with 2025 forms. However, the IRS announced earlier this year that the revised Forms W-2, 1099-NEC, 1099-MISC, and 1099-K will not include these fields until the 2026 filing season. Because workers will not receive the necessary disclosures for 2025, Notice 2025-69 permits employees to rely on existing W-2 information and traditional tip-reporting records. Cash tips included in box 7 of Form W-2 (Social Security Tips) may be treated as qualified tips, as may tips reported to employers on monthly Forms 4070, voluntarily reported in box 14 (Other) of the W-2, or included on Form 4137 for unreported tips. Employees remain responsible for evaluating whether the occupation is one that customarily received tips, consistent with the list proposed in REG-110032-25.

Independent contractors and gig workers face similar challenges because their 2025 Forms 1099 will not separate tips from other payments. The Notice therefore allows non-employees to rely on point-of-sale statements, platform earnings reports, daily tip logs, and other documentary evidence to substantiate tip amounts. The IRS also established important transition relief for determining whether tips are received in an SSTB. Because many employers and platforms have never analyzed their workers under § 199A(d)(2), the IRS will treat tips as not received in an SSTB for 2025 and future years until the first calendar year beginning after final regulations addressing this issue are issued, provided the occupation customarily received tips before 2025. This relief applies both to employees and non-employees.

Qualified overtime compensation presents additional complexities because W-2s for 2025 will not separately state the FLSA-required premium. Notice 2025-69 instructs employees to confirm that they are FLSA-covered and non-exempt before claiming the deduction. In the absence of detailed employer reporting, workers may rely on pay statements, annual earnings summaries, invoices, or similar documentation. The Notice permits three reasonable methods for identifying the FLSA-required premium portion of overtime. If the premium amount is separately listed on a pay statement, the taxpayer may deduct that amount directly. If the employer reports overtime only as a single aggregate rate of one-and-a-half times the regular wage, the taxpayer may treat one-third of the aggregate overtime amount as the required premium. For employers that pay overtime above the FLSA minimum, such as double time, taxpayers may compute the deductible amount using adjustment formulas provided in the Notice. A taxpayer may use different methods for different employers so long as each method is reasonable and supported by documentation.

These new deductions introduce several practical considerations for compliance. Employees should maintain Forms 4070, tip logs, and detailed pay statements. Employees should also confirm their FLSA classification with employers when claiming the overtime deduction. Independent contractors should retain point-of-sale reports, platform earnings statements, and contemporaneous records of tips received. Employers and payors may wish to voluntarily include tip or overtime information in box 14 of the 2025 W-2 to assist workers with substantiation and should begin preparing for the expanded mandatory reporting that will apply beginning with the 2026 tax year. All taxpayers should ensure that their returns correctly reflect their Social Security numbers, as failure to do so can result in disallowance of the deductions.

Notice 2025-69 provides welcome clarity for taxpayers seeking to claim the new deductions in a year when reporting systems have not yet caught up with statutory requirements. Although the transition rules offer flexibility for 2025, taxpayers will need to maintain adequate records and apply the reasonable methods permitted by the Notice to substantiate their claims. As the IRS prepares to issue proposed and final regulations, particularly those concerning SSTB determinations, taxpayers, employers, and service platforms should monitor developments closely and adjust their reporting and compliance systems well before the 2026 reporting year.

If your business or workforce would benefit from assistance interpreting Notice 2025-69, please contact Liskow attorneys Leon Rittenberg III, Caroline Lafourcade, and Kevin Naccari and visit our Tax practice page.