On November 21, 2025, the Internal Revenue Service (IRS) provided new guidance to implement tax deductions for individuals who received qualified tips or overtime during 2025. IRS Notice 2025-69 seeks to clarify the implementation of the “no tax on tips” and overtime policies codified through the One Big Beautiful Bill Act (OBBBA) for the 2025 tax year.
Qualified Tips
The OBBBA provides federal income tax deductions for qualified tips received by individuals in an occupation that customarily and regularly received tips before January 1, 2025. Qualified tips mean “tips from customers that are paid in cash or charged and, in the case of an employee, tips received under any tip-sharing arrangement.” An employee may only deduct qualified tips that are separately accounted for on their Form W-2 from their employer or Form 4132 for unreported tip income. The deduction may not exceed $25,000 in a taxable year and is subject to certain limitations based on total income, marital status, and inclusion of a social security number on tax returns.
Guidance for Employees
In order to calculate qualified tips, an employer must separately account for cash tips on written statements furnished to individuals through Form W-2. However, the 2025 Form W-2 has not been modified in accordance with new tips reporting requirements. Therefore, the IRS is permitting employees to report qualified tips for the purposes of a tax deduction as follows:
- Use the total amount of social security tips reported in box 7 of the Form W-2;
- Use the total amount of tips reported by the employee to the employer on all Forms 4070, Employee’s Report of Tips to Employer (or any similar substitute form used to monthly report tips to the employer); or
- If an employer voluntarily chooses to report the amount of an employee’s cash tips in box 14 of Form W-2 (or on a separate statement), the employee may use this amount in determining the amount of qualified tips for tax year 2025.
- In addition to these three options, employees may also include any amount listed on line 4 of the 2025 Form 4137 filed with the employee’s 2025 income tax return (and included as income on that return).
In order to receive a tax deduction for qualified tips, an employee must determine whether the qualified tips were received in an occupation that customarily and regularly received tips before January 1, 2025. However, the OBBBA explicitly excludes the inclusion of qualified tips received through a “specified service trade or business.” The IRS has yet to publish the necessary regulations to define a specified trade or business. Therefore, the IRS will permit a tax deduction on qualified tips if the employee is in any occupation that customarily and regularly received tips before January 1, 2025 until the end of the tax year in which such regulations are finalized.
Guidance for Non-Employees
The OBBBA permits a non-employee to receive a tax deduction for qualified tips if the tips are separately accounted for on the applicable Form 1099. However, the Form 1099 has not yet been modified for tax year 2025. Therefore, the IRS will accept cash tips reported as other income on Form 1099-MISC, Form 1099-NEC, or Form 1099-K for the coming tax year. Further, the IRS will accept qualified tips calculated using earning statements or other contemporaneous records for 2025. The non-employee will receive the same temporary relief as employees with regard to determining whether qualified tips were received in connection with a specified trade or business.
Qualified Overtime
The OBBA permits employees to receive federal income tax deductions on qualified overtime, up to $12,500 per tax return. Qualified overtime is defined as “overtime compensation paid to an individual required under section 7 of the [Fair Labor Standards Act (FLSA)] that is in excess of the regular rate at which the individual is employed.” Individuals not eligible under the FLSA may not receive a tax deduction for qualified overtime, even if the state in which they are located mandates overtime pay.
For tax year 2025, Form W-2 for reporting compensation will not be modified to include a separate accounting of qualified overtime compensation. However, employers may choose to report the amount of qualified overtime compensation using box 14 of Form W-2, which may be used by an employee to calculate their tax deduction. Employees may also utilize qualified overtime compensation reported on earning statements, contemporaneous documents, Form 1099-NEC, or Form 1099-MISC to calculate their tax deduction for qualified overtime.
Please contact us if you would like more information regarding the contents of this memorandum, or would like advice on the impact of Notice 2025-69 on your business or tribal gaming enterprise.
