How Tipped Workers and Overtime Earners Can Claim New Tax Deductions for 2025: IRS Issues Guide

The Internal Revenue Service (IRS) has released guidance, Notice 2025-69, to help millions of workers claim two major new federal income tax deductions for tips and overtime pay for the 2025 tax year.

These new deductions were created by the One, Big, Beautiful Bill Act (OBBBA) and are available for tax years 2025 through 2028. Because the IRS will not update Forms W-2 and 1099 until 2026, this new guidance explains how individual taxpayers can calculate their deductions this year without separate reporting from their employers.

The deduction amounts are taken before calculating your final tax owed and are available to all eligible taxpayers, even if they do not itemize their deductions.

Eligible workers can deduct up to $25,000 of “qualified tips” from their federal taxable income. To qualify, tips must be voluntary, such as cash or charged tips received from customers or through a tip-sharing arrangement; mandatory service charges are not included.

This benefit is for individuals in occupations that customarily and regularly received tips before 2025 (e.g., waiters, bartenders, etc.). The deduction begins to disappear (phase out) for taxpayers with a Modified Adjusted Gross Income (MAGI) over $150,000 (or $300,000 if married filing jointly).

Since your Form W-2 will not have a separate box for the new tip deduction this year, the IRS is allowing employees to use the amount listed in Box 7 (Social Security tips) on their Form W-2, or the total amount of tips reported to their employer throughout the year. Self-employed individuals must rely on their own daily tip logs and records.

Individuals who receive qualified overtime pay can deduct a portion of that income, with a maximum deduction of $12,500 for single filers and $25,000 for married couples filing jointly. Critically, the deduction applies only to the premium portion of your overtime pay—the extra amount you get above your regular hourly rate (the “half” in “time-and-a-half”).

The overtime must be required under the federal Fair Labor Standards Act (FLSA); overtime mandated only by state or local laws, or voluntary payments by your employer, do not qualify. This benefit also phases out for taxpayers with a MAGI over $150,000 (or $300,000 if married filing jointly).

Since pay statements may not separate out the qualified premium pay, the IRS has provided simple calculation methods: if you get “Time-and-a-Half,” you can calculate the deductible premium by dividing the total overtime pay by 3. If you receive “Double-Time,” you can divide the total overtime pay by 4.

The IRS is currently developing a new form, Schedule 1-A, to be used when filing your 2025 tax return to claim these new deductions. The agency encourages all eligible taxpayers to keep good records of their tips and overtime pay to ensure they can take full advantage of the new benefits during this transition year.