When the One Big Beautiful Bill Act was passed, it created four new deductions for individual taxpayers to claim on their 2025 tax returns. We’ve discussed these deductions in previous articles, so we’re not going to dive too deep into the specifics here, but if you’re interested in reading more, we recommend checking out our write-ups of the deductions for tips, overtime, or car loan interest.
Guidance has been trickling out since the bill was signed into law, with the most recent, Notice 2025-69, coming in late November 2025.
Tips for The Tips Deduction
The deduction for qualified tips requires that tips be separately stated and reported on Form W-2, Form 1099-NEC, Form 1099-MISC, or 1099-K, and that the occupation be listed. Individuals who receive tips in a Specified Service Trade or Business (SSTB) are not eligible for the tips deduction.
None of the 2025 information returns have been updated to include areas to report these new details, except that the IRS encourages employers to complete special reporting in Box 14. As a result, the reporting requirement has been delayed to 2026. So what now?
The latest guidance states that as long as the tips are included on the W-2, there are several methods that employees can use to calculate the amount of qualified tips.
Employees can:
- Use the total amount that is reported as Social Security tips in box 7 of the W-2.
- Use the total tips reported by the employee to their employer on Forms 407, Employee’s Report of Tips to Employer (a Form most tipped employees have never been acquainted with), or similar forms used to report tips to the employer on a monthly basis.
- Use the amount that employers voluntarily choose to report the employee’s “cash” tips in box 14 of the Form W-2 or on a similar statement.
- Include any amount reported on line 4 of Form 4137, which is used to calculate Social Security and Medicare taxes on unreported tips. These amounts must also be included in the individual’s income for the year.
So, you’ve figured out the amount of qualified tips, but now how do you know if you’re an SSTB? The good news is that for 2025, it doesn’t matter.
You read that right. The guidance states that, since many employees and small business owners have never had to make the determination of their status as SSTBs, more time and guidance are needed for taxpayers to understand the rules and determine whether they or their employees are eligible for the tips deduction. For these reasons, even if an employee or non-employee worker is engaged in a specified service trade for 2025, they can still claim the tips deduction. The SSTB requirement will kick in the year after the final regulations are issued.
Pulling Overtime
For taxpayers looking to claim the new deduction for qualified overtime, the deduction will be limited to only the overtime premium, which is the portion of overtime pay above the normal pay rate. The deduction is only applicable to overtime required under the Fair Labor Standards Act (FLSA), the “half” of “time and a half” paid for hours worked over 40 in a workweek. This is going to make things particularly exciting for taxpayers in states with overtime requirements that differ from the FLSA (like California).
The law requires employers to indicate qualified overtime on Form W-2, 1099-NEC, or 1099-MISC, but the new IRS guidance delays this reporting requirement. Employers may choose to report overtime paid in Box 14 of the Form W-2 or on a separate statement, but this is entirely optional.
So, how can employees and their tax professionals determine the amount of their pay that is eligible for the deduction if it doesn’t show up in Box 14? The first step will be to review the final pay stub for that employee for the year. If the employer reports the overtime premium as its own line item, your work is pretty much done. If the total reported is both the base pay and the overtime premium, and they only received FLSA overtime, the individual will take one-third of that amount to figure their allowable overtime deduction.
For example, say that John worked 43 hours in one week, and is paid a base rate of $20 per hour. For those three hours over 40 in the workweek, he will be paid $30 per hour. John’s final paystub for the year reports total overtime paid as $90. John will take one-third of the reported overtime ($30) and use that to calculate his deduction.
If John is paid double time, a different fraction to get to the deductible amount. If the total overtime reported is $120, he will take one-fourth of that amount to get to the allowable overtime premium ($30). Keep in mind that this applies only to hours worked over 40 in the workweek; if overtime is paid for hours worked over eight in one day, it is not eligible for the deduction.
But what if the overtime isn’t called out at all on the paystub? Employees will need to find documentation showing the overtime paid. There may be quite a bit of detective work required for tax year 2025 if the employer reporting is unclear.
The Bottom Line
We expect to see more guidance on these new provisions released in the coming months, but for tax year 2025, claiming both the tips and overtime deductions will require some extra work and some extra diligence.
Want to know more about this and all the latest guidance? Join us for the Update for 2025 Returns in-person or on-demand.