IRS Issues Interim Guidance on New Overtime and Tip Deductions for 2025

The Internal Revenue Service (IRS) recently released Notice 2025-62 and Notice 2025-69 that provide temporary rules for workers to claim the new Qualified Tips Deduction and Qualified Overtime Deduction for tax year 2025. These deductions were part of the One Big Beautiful Bill Act (OBBBA) and are effective through 2028, unless extended by future litigation. Because employers will not separately report these amounts until 2026, the IRS is allowing taxpayers to rely on alternative documentation for 2025 to claim these tax deductions.

Employer Considerations

• No changes are required to 2025 W-2 reporting.
• For the 2025 tax year, overtime wage reporting is not required and will not appear on Forms W-2. If you would like this information, please request a detailed report of your employees’ overtime wages from your payroll specialist.
• However, for the 2026 tax year, employers will be required to list the following on Forms W-2: an employee's occupation, separately report amounts designated as cash tips, and list the total amount of qualified overtime compensation.
• No penalties will apply under Internal Revenue Code (IRC) §§ 6721 and 6722 (failure to correct information returns and furnish correct payee statements, respectively) for employers or payors who: 
  • Do not separately report amounts designated as cash tips or an employee’s occupation on a Form W-2.
  • Do not separately list the total amount of qualified overtime compensation.
• This relief discussed above only applies if a Form W-2 is otherwise accurate and complete—meaning total amounts (e.g., all cash tips and overtime) are correctly included in the regular wage boxes.
• Employers should maintain accurate tip and overtime records to support their employee’s tax claims.
• The IRS encourages employers to share detailed tip and overtime information with their employees. Employers may do so via: 
  • An online portal,
  • Additional written statements,
  • Other secure communication methods, or
  • Box 14 of Form W-2 for overtime amounts.
• Enhanced reporting will begin in 2026.

Employee Considerations

• Qualified Tips Deduction
• This deduction includes qualified cash tips, up to $25,000 (phaseout begins at $150,000 Modified Adjusted Gross Income (MAGI)/$300,000 if a taxpayer files jointly).
• Married individuals must file jointly.
• To be eligible, the tips must be received by an individual engaged in an occupation that “customarily and regularly received tips” on or before 12/31/24.
• For 2025, employees may rely on Box 7 (Social Security tips), Forms 4070, Box 14 statements or Form 4137.
• Contractors may use point of sale (POS) records, tip logs, or earnings statements.
• IRS will not enforce the Specified Service Trade or Business (SSTB) exclusion for tax year 2025. Afterwards, certain occupations (i.e., health care, performing arts, and athletics) will not be eligible to claim this deduction. 
• Qualified Overtime Deduction
• This deduction is equal to the Fair Labor Standards Act (FLSA)-required overtime premium, up to $12,500 (or $25,000 if filing jointly), with the same MAGI phaseouts.
• Married individuals must file jointly.
• Only FLSA-required overtime qualifies (not employer-provided extra premiums).
• For 2025, taxpayers may use payroll records or other documentation to substantiate the FLSA overtime premium.