Guidance for Employees to Claim Qualified Tips & Qualified Overtime Compensation

Starting in 2025, employees can deduct a certain amount of their Qualified Tips and Qualified Overtime Compensation. These deductions reduce taxable income, and you do not need to itemize to claim them. Since the Form W-2 will remain unchanged for tax year 2025 and employers are not required to separately report these amounts, the IRS has provided guidance in Notice 2025-69 to help employees determine their deduction.

1. No Tax on Tips (Deduction up to $25,000)

This is for cash tips, credit card tips, or shared tips you receive and report.

• Who Qualifies? You must work in an occupation that traditionally receives tips (like wait staff, bartenders, ride-share drivers, etc.).
• How to Figure the Amount (for 2025): Since employers don't have to report this amount yet, you can use these sources:
  • The amount your employer voluntarily reports in Box 14 of your W-2.
  • The Social Security Tips reported in Box 7 of your W-2.
  • The tips you reported to your employer (using Form 4070 or similar).

2. No Tax on Overtime (Deduction up to $12,500)

This deduction only applies to the extra pay you get for working overtime hours required by federal law (the FLSA).

• What Qualifies? Only the "half-time" premium of your "time-and-a-half" pay (the amount that exceeds your normal hourly rate) is deductible. Payments in excess of the FLSA-required premium do not qualify.
• How to Figure the Amount (for 2025):
  • If your final wage statement separately reports the qualified premium (e.g., in Box 14 of your W-2), use that amount.
  • If the statement reports a “time and a half” number, the individual may use one-third of that amount, since one-third of the total amount presumably reflects the half-time overtime premium.
  • If the statement reports a number based on a rate above a “time and a half” number, you may use an appropriate fraction to isolate the FLSA-required premium amount. For example, if an employer voluntarily pays “double time” for overtime worked on weekends, then one-quarter of that amount would presumably reflect the overtime premium required by the FLSA.

Key Takeaways

• Keep Your Records: Since employer reporting might be unclear in 2025, hold onto your W-2, pay stubs, tip records (Form 4070), and time records to accurately claim these deductions when you file your 2025 tax return.
• Check Your Income: Both deductions have income limits (they phase out if your income is high).
• Taxes Still Withheld: Your employer will still withhold income tax, Social Security, and Medicare taxes on your tips and overtime. You get the benefit back when you file your return.