Notice Details 2025 Filing Instructions for ‘No Tax on Tips, Overtime’

The U.S. Internal Revenue Service (IRS), along with the Department of the Treasury, on Friday, Nov. 21, issued guidance for American workers who are eligible to claim a deduction for tips and/or overtime compensation for tax year 2025. These deductions were among the provisions set forth in the H.R. 1 law (otherwise known as the One Bill Beautiful Bill Act), codified on July 4.

Employers and their HR and total rewards (TR) professionals should:

Examine Notice 2025-69, the agencies’ 30-page guidance document;
Consult with their organization’s tax professionals, if needed; and then,
Create and disseminate information to help related employees best prepare for the upcoming tax season by understanding how to correctly identify and claim their deduction amount.

The IRS noted that it is updating income tax forms and instructions for taxpayers to use this filing season that also will assist them in claiming these deductions.

‘No Tax on Tips’ Implications

Regarding the “no tax on tips” component of H.R. 1, the new federal guidance document explains that 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 that figure on their 2025 taxes. Otherwise, the employee may determine their qualified tips for tax year 2025 by noting:

Social security tips reported in Box 7 of the Form W-2; and,
Tips reported by the employee to the employer on Form 4070 (“Employee’s Report of Tips to Employer”) or similar substitute forms.

The employee also may include any dollar amount listed on Line 4 of their 2025 Form 4137 (“Social Security and Medicare Tax on Unreported Tip Income”) filed with their 2025 income tax return (and included as income on that return).

The notice underscored that the “no tax on tips” deduction applies only to tips received by employees in an occupation that customarily and regularly received tips, as identified by the Secretary of the Treasury. A proposed regulation published in September listed 68 qualifying tipped occupations for which workers can claim a deduction on their “qualified tips.”

H.R. 1 defines “qualified tips” as for-service remuneration that is “paid voluntarily without any consequence in the event of nonpayment,” not the subject of negotiation, and determined by the customer/payer. While “cash tips” are the most common means toward deduction application, the law defines that term to include:

Tips “paid in cash or charged” plus “tips received under any tip-sharing arrangement”; and,
Tangible “non-cash” tips (e.g., concert tickets, a gift basket), listed in dollar-value equivalent.

For tipped workers, the maximum annual deduction (for the 2025 through 2028 tax years) is $25,000, which phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).

‘No Tax on Overtime’ Implications

Regarding the “no tax on overtime” component of H.R. 1, the IRS/Treasury notice encouraged employers to provide applicable employees with a statement of their “qualified overtime compensation for tax year 2025.” The employee may use that information (e.g., the amount in Box 14 of Form W-2 or in a separate statement) for their taxes.

If the employer doesn’t provide that specific information, the employee may determine the amount of qualified overtime compensation using other documentation (e.g., time records, earnings/pay statements, invoices), using a “reasonable method” to determine the correct amount.

Section 7 of the Fair Labor Standards Act (FLSA) defines “qualified overtime compensation” as “pay for hours worked in excess of 40 in a workweek, at a rate not less than one and one-half times the regular rate of pay.” Section 13(a)(1) of the FLSA outlines that an employee is not exempt from overtime compensation unless they are paid a salary that is above a specified threshold (currently $35,568) and work in an executive, administrative, professional, computer or outside sales role.

The guidance reminded that only overtime required by the FLSA (and only the “half time” overtime premium) qualifies for the deduction. The deduction does not apply to overtime premiums required under state laws or collective bargaining agreements. It also has no effect on Social Security and Medicare taxes. To prevent “double dipping” on new H.R. 1 tax deductions, qualified tips subject to the “no tax on tips” provision can’t also be claimed as qualified overtime compensation. Also, the deduction is not allowed unless the taxpayer includes their social security number on their tax return.

For the 2025 through 2028 tax years, qualified workers can deduct up to $12,500 ($25,000 in the case of a joint return) in overtime pay from their annual income subject to federal income tax. This amount is reduced by $100 for each $1,000 in cases where the taxpayer’s modified adjusted gross income (MAGI) is greater than $150,000 ($300,000 in the case of a joint return).

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