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In-Depth: IRS Guidance for Recipients of Qualified Tips or Overtime Pay in 2025

(Parker Tax Publishing December 2025)

The IRS issued guidance for workers eligible to claim the deduction for qualified tips under Code Sec. 224 and for overtime compensation under Code Sec. 225 for tax year 2025. The guidance clarifies for workers how to determine the amount of their deduction without receiving a separate accounting from their employer for cash tips or qualified overtime. The guidance also provides a transitional rule under which the IRS will treat an employee as having received tips in the course of a trade or business that is not an SSTB if the employee is in an occupation that customarily and regularly received tips on or before December 31, 2024. Notice 2025-69.

Practice Aid: Use Parker's CPA Sample Client Letter as a template or just sign your name at the bottom. Parker's Sample Client Letter regarding Deduction for Qualified Tips Parker's Sample Client Letter regarding Deduction for Overtime Pay
 

Background

The One Big Beautiful Bill Act (OBBBA) added Code Sec. 224 to provide a deduction for "qualified tips" that are received during the tax year by individuals in an occupation that customarily and regularly received tips on or before December 31, 2024. The OBBBA also added Code Sec. 225 to provide a deduction for "qualified overtime compensation," defined in Code Sec. 225(c) as overtime compensation paid to an individual required under Section 7 of the Fair Labor Standards Act of 1938 (FSLA) that is in excess of the regular rate at which the individual is employed. Both deductions are available for tax years beginning after December 31, 2024, and ending before December 31, 2029.

OBBBA Information Reporting Requirements for Qualified Tips and Overtime Pay

The OBBBA added to the information reporting requirements of the Code for employers and other payors making payments of cash tips by:

  • amending Code Sec. 6041(a) to require a payor to include on the Form W-2, Wage and Tax Statement, Form 1099-NEC, Nonemployee Compensation, or Form 1099-MISC, Miscellaneous Information, filed with the IRS a separate accounting of any such amounts reasonably designated as cash tips and the occupation of the person receiving such tips;
     
  • adding new paragraph (d)(3) to Code Sec. 6041 to provide that, in the case of compensation to non-employees, a payor is required to include on the written statement furnished to the payee the portion of payments reasonably designated as cash tips and the occupation f the person receiving such tips;
     
  • amending Code Sec. 6041A(a) to require a payor to include on the Form 1099-NEC or Form 1099-MISC filed with the IRS a separate accounting of any such amounts reasonably designated as cash tips and the occupation of the person receiving such tips;
     
  • adding new paragraph (e)(3) to Code Sec. 6041A to provide that, in the case of Code Sec. 6041A(a), a payor is required to include on the written statement furnished to the payee the portion of payments reasonably designated as cash tips and the occupation of the person receiving such tips;
     
  • adding new paragraph (a)(3) to Code Sec. 6050W to provide that, in the case of a third party settlement organization (TPSO), the TPSO must include on the Form 1099-K, Payment Card and Third Party Network Transactions, filed with the IRS the portion of reportable payment transactions that have been reasonably designated by payors as cash tips and the occupation of the person receiving such tips;
     
  • amending Code Sec. 6050W(f)(2) to require a TPSO to include on the written statement furnished to the payee a separate accounting of any such amounts that have been reasonably designated by payors as cash tips and the occupation of the person receiving such tips; and
     
  • adding new paragraph (a)(18) to Code Sec. 6051 to provide that an employer must include on the written statement furnished to the employee the total amount of cash tips reported by the employee under Code Sec. 6053(a) and the occupation of such person.

For qualified overtime compensation, the OBBBA added to the information reporting requirements of the Code for employers and certain other payors by:

  • adding new paragraph (a)(19) to Code Sec. 6051 to provide that an employer must include on the written statement furnished to the employee the total amount of qualified overtime compensation;
     
  • amending Code Sec. 6041(a) to require a payor to include on the Form W-2, 1099-NEC, or 1099-MISC filed with the IRS a separate accounting of any amount of qualified overtime compensation; and
     
  • adding new paragraph (d)(4) to Code Sec. 6041 to provide that a payor is required to include on the written statement furnished to the payee the portion of payments that are qualified overtime compensation.

IRS Relaxes Reporting Requirements for Payments Made in 2025. In an August 7 press release (IR-2025-82), the IRS announced that there will be no changes to the 2025 Form W-2, Form 1099-NEC, Form 1099-MISC, or Form 1099-K to account for the new reporting requirements in the OBBBA. As a result, employers and other payors will not be required to separately account for cash tips or qualified overtime compensation on those forms on the written statements (copies of the forms) furnished to individuals for 2025. In addition, in Notice 2025-62 the IRS provided penalty relief for 2025 from the new information reporting requirements for cash tips and qualified overtime compensation to employers and other payors for not filing correct information returns and not providing correct payee statements to employees and other payees.

Notice 2025-69

On November 21, the IRS issued Notice 2025-69 to provide guidance to individual taxpayers who are eligible to claim a deduction for qualified tips or qualified overtime compensation for tax year 2025. In the absence of information reporting for cash tips or qualified overtime pay, the notice provide guidance for individual taxpayers on how to satisfy the requirements for the deductions, including how to determine the amount of the qualified tips or qualified overtime compensation for the 2025 tax year.

Notice 2025-69 also provides transition relief for taxpayers regarding the requirement in Code Sec. 224(d)(2) that qualified tips must not be received in the course of a trade or business that is a specified trade or business (SSTB) under Code Sec. 199A(d)(2).

Determining the Amount of Qualified Tips for 2025

For tax year 2025, an employee may (1) treat the Code Sec. 224(a) requirement that qualified tips be included on a statement furnished to the employee pursuant to Code Sec. 6051(a)(18) as satisfied if the employee's cash tips are properly reported on the employee's Form W-2, without regard to the requirements of Code Sec. 6051(a)(18) (to separately account for the total amount of cash tips reported by the employee under Code Sec. 6053(a)), and (2) calculate the amount of qualified tips (subject to the other limitations and requirements for qualified tips in Code Sec. 224) for tax year 2025 as follows:

(1) Use the total amount of social security tips reported in box 7 of the Form W-2;

(2) Use the total amount of tips reported by the employee to the employer on all Forms 4070, Employee's Report of Tips to Employer (or any similar substitute form used to monthly report tips to the employer); or

(3) 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 this amount in determining the amount of qualified tips for tax year 2025.

In addition to these three options, employees may also include any amount listed on line 4 of the 2025 Form 4137 filed with the employee's 2025 income tax return (and included as income on that return).

Occupation That Customarily and Regularly Received Tips. Although the occupation of an employee receiving tips may not appear on the Form W-2 furnished to the employee in 2025, the employee is still responsible for determining whether the tips received by the employee were received in an occupation that customarily and regularly received tips on or before December 31, 2024. The IRS provided a list of occupations that customarily and regularly received tips in Prop. Reg. Sec. 1.224-1(f). The IRS noted that some employers may choose to provide information on an employee's occupation or other relevant information to employees using box 14 of Form W-2, in which case employees may rely on that information.

Transition Rule for Tips Received in an SSTB

Code Sec. 224(d)(2)(B) provides that any amount a taxpayer receives while working (as either a self-employed person or an employee) for a "specified service trade or business" (SSTB) is not a qualified tip. Notice 2025-68 states that additional guidance is needed to help employees and employers in determining whether an employer's trade or business is an SSTB. Accordingly, the IRS will provide a transition period for purposes of enforcement and administration of the SSTB requirement. Specifically, until January 1 of the first calendar year following the issuance of final regulations regarding the determination of whether a trade or business is an SSTB for purposes of Code Sec. 224, the IRS will treat an employee as having received tips in the course of a trade or business that is not an SSTB if the employee is in an occupation that customarily and regularly received tips on or before December 31, 2024.

Determining the Amount of Qualified Tips for Non-Employees

For purposes of satisfying the requirements of Code Sec. 224(a) for tax year 2025, a non-employee may -

(1) treat the Code Sec. 224(a) requirement that qualified tips be included on a statement furnished pursuant to the requirements of Code Secs. 6041(d)(3), 6041A(e)(3), or 6050W(f)(2) as satisfied if the non-employee's cash tips are included in the total amounts reported as other income on the Form 1099-MISC, nonemployee compensation on the Form 1099-NEC, or payment card/third-party network transactions on the Form 1099-K furnished to the non-employee, and

(2) calculate the amount of qualified tips (subject to the other limitations and requirements for qualified tips under Code Sec. 224) 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 that are qualified tips for tax year 2025.

Example: If a payor issues an earnings statement to contractors who provide services to the payor, the contractor may use the amount designated as tips by the payor on the earnings statement in determining the amount of qualified tips, provided the other limitations and requirements for qualified tips are satisfied, and provided the contractor maintains a copy of the earnings statement in accordance with IRS recordkeeping requirements. Non-employee payees may also consult with the payor regarding any available information that may assist in determining and documenting the amount of qualified tips.

SSTB Transition Relief Also Applies to Non-Employees. The transition relief described above for determining whether tips were received in connection with an SSTB also applies to non-employees. Therefore, until January 1 of the first calendar year following the issuance of final regulations regarding the determination of whether a trade or business is an SSTB for purposes of Code Sec. 224, the IRS will treat the non-employee as having received tips in the course of a trade or business that is not an SSTB if the non-employee is in an occupation that customarily and regularly received tips on or before December 31, 2024.

Qualified Overtime Compensation

Determining Whether an Individual is Covered and Nonexempt. Because employers and other payors will not be required to separately account for qualified overtime compensation, a separate accounting of qualified overtime compensation will not appear on written statements furnished to individuals for tax year 2025 absent an entry in box 14 of Form W-2 or a separate statement containing that information. Consequently, individuals who are not furnished a separate accounting of qualified overtime compensation in box 14 of Form W-2 (or on a separate statement) must make a reasonable effort to determine whether they are considered FLSA-eligible employees, which may include asking their employers or other service recipients about their status under the FLSA.

Determining the Amount of Qualified Overtime Compensation

If the individual is paid overtime compensation at a rate of one and one-half times the individual's regular rate for hours worked in excess of 40 hours in a workweek, and receives a statement covering the entire 2025 tax year that separately accounts for the overtime premium, which is generally, the "half" portion of the "one and one-half times" amount (the FLSA Overtime Premium), the individual may use that separate amount.

For situations in which the qualified overtime is not separately accounted for in a statement covering the entire 2025 tax year, individuals may use any of the following reasonable methods for purposes of determining the amount of qualified overtime compensation:

  • If the individual is paid overtime compensation at a rate of one and one-half times the individual's regular rate for hours worked in excess of 40 hours in a workweek, and receives a statement covering the entire 2025 tax year that does not separately account for the FLSA Overtime Premium, but does include an entry showing the aggregate dollar amount of the FLSA Overtime Premium combined with the portion of the individual's regular wages for the hours worked over 40 in a workweek, the individual may use one-third of that aggregate dollar amount.
     
  • If the individual is paid overtime compensation at a rate in excess of one and one-half times the individual's regular rate for hours worked in excess of 40 hours in a workweek, (for example, two times the individual's regular rate), and receives a statement covering the entire 2025 tax year that separately accounts for the portion in excess of the employee's regular rate, the individual may multiply that separate amount by an appropriate fraction to approximate the FLSA Overtime Premium (for example, if overtime is paid at a rate of two times the regular rate, the appropriate fraction is one-half) and use the product.
     
  • If the individual is paid overtime compensation at a rate in excess of one and one-half times the individual's regular rate for hours worked in excess of 40 hours in a workweek, (for example, two times the individual's regular rate), and receives a statement that does not separately account for the FLSA Overtime Premium but does include an entry showing the aggregate dollar amount of overtime compensation at that higher rate for the hours worked over 40 hours combined with the portion of the individual's regular wages for the hours worked over 40 in a workweek covering the entire 2025 tax year, then the individual may multiply the aggregate dollar amount by an appropriately smaller fraction (for example, if overtime is paid at a rate of two times the regular rate, the appropriate fraction is one-fourth) and use the product.
     

If applying the above methods would result in underestimating the employee's qualified overtime compensation (for example, because the individual's regular rate is increased by a nondiscretionary bonus), the individual may adjust the method to take the difference into account.

If the individual is paid overtime compensation at a rate described above but does not receive any statement covering the entire 2025 tax year separately accounting for the FLSA Overtime Premium, the aggregate dollar amount of FLSA overtime, or the aggregate dollar amount of overtime compensation paid at a higher rate, the individual may use a reasonable method that takes into account: (1) the regular rate under 29 USC Sec. 207(e) paid to the individual by the employer (or a reasonable approximation of this amount), and (2) the individual's hours of service in excess of 40 hours in a workweek (or a reasonable approximation if the individual does not have records of actual hours of service) for purposes of determining the amount of qualified overtime compensation under Code Sec. 225(c). A reasonable method includes requesting information from the individual's employer and using the information provided by the employer for purposes of calculating the deduction.

Use of Alternative Documents. The IRS states in the guidance that it is aware that documents such as earnings statements and pay stubs take a variety of forms, and employers and other service recipients provide overtime compensation in a variety of ways (including, for example, combining State-required and FLSA-required overtime). Individuals may use the amounts reported as overtime compensation on earnings statements, pay stubs, and other documentation provided by payors to calculate the FLSA Overtime Premium for 2025. For example, individuals may approximate the amounts of FLSA Overtime Premium by using overtime amounts reported on a pay statement or similar document that covers all wages paid in 2025. In all cases, individuals must maintain copies of any documents they rely on in accordance with IRS recordkeeping requirements.

Special Rules for Public Sector Employees. If an individual's employer satisfies the requirements under 29 USC Sec. 207 by operation of another subsection of the FLSA other than 29 USC Sec. 207(a) (including but not limited to public sector employees in fire protection and law enforcement (29 USC Sec. 207(k)), employees of a political subdivision of a State or an interstate governmental agency who receives compensatory time off in certain circumstances in lieu of cash overtime compensation (29 USC Sec. 207(o)), and employees of hospitals or certain residential care facilities (29 USC Sec. 207(j)), the individual must compute the amount of overtime compensation by operation of the different overtime rules used in the relevant provision of 29 USC Sec. 207 that apply to the individual and may use any reasonable method contained in Notice 2025-69 that takes those alternative overtime rules into account.

For a discussion of the deduction for qualified tips, see Parker Tax ¶81,700. For a discussion of the deduction for qualified overtime compensation, see Parker Tax ¶81,800.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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