The IRS has released guidance (Notice 2025-69 (Notice)) for employees and other individuals eligible to claim the deductions for qualified tips and qualified overtime compensation on how to calculate these amounts for 2025 absent a separate accounting from their employer. The IRS specifies which information to use, explains how to make the calculations and provides examples.

Background

The "One Big Beautiful Bill Act" (P.L. 119-21, OBBBA) allows, for tax years 2025 through 2028, a federal income tax deduction for qualified tips of up to $25,000 for both employees and independent contractors and for qualified overtime compensation of up to $12,500 (see Tax Alert 2025-1476).

Qualified tips are defined as any cash tip received by an individual in an occupation that customarily and regularly received tips on or before December 31, 2024, as provided by Treasury. The OBBBA also specified that tips do not qualify for the deduction if the individual receiving them works for a specified service trade or business (SSTB) (as defined in IRC Section 199A(d)(2)), including health care, performing arts and athletics.

In September 2025, proposed regulations were released, defining "qualified tips" for purposes of the deduction and listing the qualifying occupations (see Tax Alert 2025-1907).

No regulations have been proposed on qualified overtime compensation.

Reporting requirements

Under the OBBBA, cash tips and the individual's occupation must be reported on certain Forms 1099 and on Form W-2 beginning with calendar year 2025, and qualified overtime compensation must be reported on Form W-2, Form 1099-NEC or Form 1099-MISC.

The IRS announced in August 2025 that it will not update 2025 individual information returns/statements (Forms W-2/1099) or withholding tables to reflect those changes and that the reporting will apply beginning with the forms due on February 1, 2027, for calendar year 2026 (see Tax Alerts 2025-1671, 2025-1745).

In Notice 2025-62, the IRS said that employers will not be subject to penalties for 2025 for failure to file correct information returns and furnish correct payee statements reporting qualified tips and qualified overtime compensation (see Tax Alert 2025-2250). Employers were encouraged to voluntarily provide a separate statement to individuals that includes this information.

Notice 2025-69

Because many employees will not receive the information reporting from their employers, the Notice informs individuals how to determine the amounts to report on their 2025 tax returns. The Notice also temporarily relieves individuals from having to determine whether they received qualified tips from an SSTB.

Tips deduction

Under the Notice, individuals may report as their qualified tips any of the following:

• The social security tips reported in box 7 of Form W-2
• The tips reported by the employee on Form 4070, Employee's Report of Tips to Employer (or any similar substitute form)
• The amount an employer voluntarily reports in box 14 of Form W-2 (or on a separate statement)
• The 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

The Notice also specifies that non-employees that receive a Form 1099-MISC, 1099-NEC or 1099-K may calculate their tips by using 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 that corroborates the calculation of the total amount of tips.

Although the proposed regulations specified how to determine whether a business is an SSTB, which would disqualify the tips, the IRS acknowledged that more time was needed for employees and employers to make this new determination. Thus, until final regulations take effect, the IRS will consider tips received by employees in occupations that regularly received tips as of December 31, 2024, to be from a business that is not an SSTB.

Limitation on tips deduction

Employees and non-employees may only deduct as qualified tips the amount correctly reported on Form W-2 or Form 1099. For example, if only half of an employee's tips are reported on Form W-2, the employee's qualified tips are limited to that amount, even if all other requirements are met. A non-employee whose tips are not reported on Form 1099 could not deduct any qualified tips, even if the tips are reported as income on the individual's tax return.

Overtime deduction

The Notice reiterated that overtime is only considered qualified overtime compensation if it is paid to individuals who are both covered by and not exempt from section 7 of the Fair Labor Standards Act (FLSA), even if they get overtime under state law or for other reasons.

To calculate qualified overtime compensation, FLSA-eligible individuals may use the compensation reported on their Form W-2, 1099-NEC or 1099-MISC and base the qualified overtime compensation on other documents such as earnings or pay statements, invoices or similar statements, using a reasonable method. The Notice lists seven methods, depending on how pay is reported, that are considered reasonable.

Employees who had multiple employers during 2025 may use a different method for each employer.

As with qualified tips, employees and non-employees may only deduct the amount of qualified overtime compensation correctly reported on Form W-2 or 1099. This requirement is more likely to be satisfied for qualified overtime compensation than for qualified tips.

Implications

The Notice should allay the fears of some taxpayers, and even some practitioners, that employees' 2025 deductions for qualified tips and qualified overtime compensation might be unavailable unless their employers voluntarily reported qualified tips and qualified overtime compensation.

For the tips deduction, the SSTB relief is more generous than the proposed regulations and is welcome news to taxpayers.

For the overtime deduction, the Notice represents the IRS's first detailed guidance, which may be more complicated than many employers — let alone employees — were expecting. Although employer information reporting is optional for 2025, and employees may rely on pay stubs and similar employer documents, employees may still not have sufficient information to calculate their overtime deduction in the manner described in the Notice. For instance, the employee may not know whether total overtime pay reported on the paystub is computed at 1.5 times or two times the regular rate of pay.

Accordingly, employers may wish to familiarize themselves with the guidance in the Notice and prepare themselves to address questions they are likely to receive from employees, including whether the employee is an FLSA-eligible employee. Employers may also consider providing a separate statement to employees that shows one of the following:

• The premium portion of pay and the rate at which it was computed (e.g., two times the regular rate)
• The total overtime pay and the rate at which the premium portion was determined (e.g., two times the regular rate of pay)
• The qualified overtime compensation amount (the premium portion of overtime pay that is required under the specific section of federal labor law that is relevant to the qualified overtime compensation deduction)

Although not directed at employers, the Notice gives them an indication of the IRS's exacting interpretation of "qualified overtime compensation," which is information that employers will be required to report on 2026 Forms W-2 (filed and furnished in early 2027). Employers may wish to make their concerns known to Treasury and the IRS if they anticipate challenges complying with this reporting requirement. The Notice does not request comments; as it is unclear when proposed regulations or other guidance soliciting feedback from employers might be published, employers may wish to act quickly.