More Guidance for Tips and Overtime Deductions

IRS Notice 2025-69 provides more guidance regarding the new deductions for tips and overtime. Since information is not required to be reported by employers to employees for the 2025 tax year, the IRS has provided a series of methods and examples for employees to follow in determining the amount of these deductions for the 2025 tax year.

For tips, the notice indicates that employees can use four possible methods to determine the tips received for the 2025 year.

Method 1: Use the amount reported for Social Security tips in box 7 of Form W-2, or

Method 2: Use the amount of tips reported by the employee to the employer (which can be reported on Form 4070, Employee’s Report of Tips to Employer, or any similar substitute form used to report tips to the employer), or

Method 3: Use the amount of tips reported by the employer in box 14 of Form W-2, if the employer voluntarily reports this information, or

Method 4: In addition to any amount determined using any one of the first 3 methods, the employee can also include any amount reported on Form 4137, Social Security and Medicare Tax on Unreported Tip Income.

In addition, the notice indicates that the IRS will delay the effective date of the rule that prohibits the tip deduction for occupations that meet the definition of a specified service trade or business. For now, any occupation that regularly received tips on or before December 31, 2024 will be treated as not being a specified service trade or business. In the future, the restriction will become effective on January 1 of the first calendar year following the issuance of final regulations regarding the determination of whether a trade or business is a specified service trade or business for the purpose of the tips deduction.

For overtime, the notice indicates that employees can use information about overtime compensation provided by the employer, either in box 14 of Form W-2 or on a separate statement, if the employer voluntarily provides this information. If the employer does not voluntarily provide this information, the employee can use earnings or pay statements or similar statements that support the determination of the amount of overtime paid.

Since only the overtime premium itself is eligible for the new overtime deduction, if the amount of the overtime premium is not voluntarily reported by the employer, the employee can determine the amount of overtime pay that is eligible for the deduction by multiplying the total overtime compensation by a ratio to determine the overtime premium.

In our upcoming seminars, we will discuss strategies and logistics for determining the deductions for both tips and overtime.

Are you registered for one of our upcoming seminars in December and January? If you are not already registered, register here so you’ll be fully prepared with what you need to know, including the major new federal tax law enacted on July 4th.