How Qualified Tips and Overtime Can Still Be Deducted

The IRS issued Notice 2025-69 to provide guidance and transition relief for the 2025 tax year for individuals to aid in the calculation of the new OBBA deductions for qualified tips and overtime. This transition relief is necessary because the IRS did not update the 2025 Forms W-2 or 1099 to account for these new deductions.

Qualified Tips – Employees (IRC Section 224)

For employees claiming the deduction for qualified tips under IRC section 224, qualified tips can be calculated using one or more of the following sources:

• The total amount of Social Security tips reported on Form W-2, Box 7

• Tips reported by the employee to the employer on all Forms 4070, Employee’s Report of Tips to Employer, or any similar substitute form

• Cash tips reported on Form W-2, Box 14, or on a separate statement, if the employer voluntarily reports this information

• Any amount listed on Line 4 of Form 4137, Social Security and Medicare Tax on Unreported Tip Income, filed with the employee’s 2025 income tax return

During the 2025 transition year, these amounts can be deducted on the 2025 return, even if they may include mandatory tips that would otherwise not be included in qualified tips.

Taxpayers can only claim the deduction for qualified tips if the tips were received in an occupation that customarily and regularly received tips on or before December 31, 2024.

Qualified Tips – Self-Employed Taxpayers

Self-employed taxpayers can calculate their qualified tips through either:

• A separate statement provided by a 1099 issuer, because 2025 Forms 1099 were not modified to separately report qualified tips, or

• Earnings statements or other documentation such as receipts, point-of-sale system reports, daily tip logs, third-party settlement organization records, or other documentary evidence

These records may be used as long as the tips were included in the total amount reported on the 1099s, even though the tips were not separately stated.

Specified Service Trade or Business Transition Relief

The qualified tips deduction is only allowed if the tips are received in a non-specified service trade or business. Because additional guidance is needed to help make this determination, 112the IRS has created a transition period regarding whether qualified tips were received by a specified service trade or business.

For the 2025 tax year, the IRS will treat anyone — employees and self-employed taxpayers — who receives tips while performing work in an occupation that customarily receives tips as if the tips were received in a non-specified service trade or business.

Qualified Overtime – 2025 Tax Year Only

Regarding overtime for the 2025 tax year only, if an employer does not provide an accounting of qualified overtime to the employee, the employee can use any reasonable method to calculate their qualified overtime.

Reasonable methods of accounting for overtime must be based on documentation such as earnings or pay statements, invoices, or similar records.

Only overtime paid to employees based on the federal Fair Labor Standards Act is eligible for the overtime deduction.

If the employer provides the employee with the qualified overtime paid, either in Box 14 of the employee’s Form W-2 or in a separate statement, the employer’s figure must be used, and the alternate method for calculating qualified overtime may not be used.

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