Treasury, IRS Provide Guidance for Tax Year 2025 for Individuals Claiming Deductions for Qualified Overtime and Qualified Tips
Part of a series | The One Big Beautiful Bill Act Series
The Notice offers guidance to individuals for claiming deductions for qualified overtime and qualified tips for tax year 2025.
The Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) issued Notice 2025-69 (Notice 2025-69 or the Notice) on November 21, 2025. The Notice offers guidance to individuals for claiming deductions for qualified overtime and qualified tips for tax year 2025. This guidance applies to new deductions for overtime and tips included in H.R. 1, The One Big Beautiful Bill Act (the Act), which was signed into law on July 4, 2025.
The new law created income tax deductions for qualified tips and qualified overtime compensation. For additional background information on these provisions, review our prior articles:
- H.R.1, the One Big Beautiful Bill Act, Enacted July 4, 2025
- Early Guidance Issued under H.R. 1, The One Big Beautiful Bill Act
- Treasury, IRS Provide Penalty Relief for Tax Year 2025 for Information Reporting on Tips and Overtime Under the One Big Beautiful Bill Act
Transition Guidance for Individuals (Tax Year 2025 Only)
Notice 2025-69 provides guidance to individual taxpayers for calculating the amount of qualified tips and qualified overtime that they can deduct for 2025.
Because the deductions for qualified tips and qualified overtime were adopted retroactive to January 1, 2025, the Act provided transition rules for 2025 to give employers, other payors, and payroll providers time to adjust systems and reporting processes.
Notice 2025-62, issued in early November, provided relief to employers and other payors from the penalties under Internal Revenue Code (Code) sections 6721 and 6722 for failure to file or furnish correct information returns and payee statements. While Notice 2025-62 encouraged employers and payors to provide employees and payees with a separate statement with cash tip amounts, qualified overtime compensation, and the occupation codes of the person receiving cash tips, employers and payors are not required to do so for 2025. Notice 2025-62 also indicated that the IRS would issue additional information related to how individuals would be able to use information provided to them by employers and payors as directed by Notice 2025-62. Such additional information is set forth in Notice 2025-69.
Determining the Amount of Qualified Tips
Estimating 2025 Qualified Tips
The Notice provides several options that individuals can use to calculate their 2025 qualified tips. To claim the deduction for qualified tips on their individual income taxes, individuals must first determine their qualified tip amount using one of the methods provided in the Notice. The deduction remains subject to all applicable limits, including a cap of $25,000 and a phase out of the deduction for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).
If an employee or worker receives a Form W-2 or Form 1099-series which includes cash tip amounts, they can use the reported amount to assist in claiming their 2025 individual tax deduction (even if the cash tip amounts are not displayed separately) and can use either (i) the total amount of tips reported in Form W-2, Box 7 for 2025; (ii) the total amount of tips reported in 2025 by the employee to their employer on Form 4070 (Employee's Report of Tips to Employer) or any similar form used to report tips monthly to an employer; or (iii) the amount of 2025 cash tips provided voluntarily by their employer. Regardless of the option used, an employee can also include any additional tips from Line 4 of 2025 Form 4137 (Social Security and Medicare Tax on Unreported Tip Income).
Note – The Notice also states that employers may provide employees with a separate accounting of cash tips by utilizing Form W-2, Box 14, which is an addition to the methods previously provided in Notice 2025-62.
Similarly, independent contractors can calculate their 2025 qualified tips by using earnings statements or other documentation such as receipts, point-of-sale system reports, daily tip logs, third party settlement organization records, or other documents that support their calculation.
The deduction for qualified tips for both employees and independent contractors is only available to tips received while working in an occupation that customarily and regularly received tips on or before December 31, 2024. Beginning in 2026, companies will be required to include a worker's Treasury tipped occupation code (TTOC) on their Form W-2 or Form 1099-series. For 2025, individuals are responsible for confirming that tips were received while working in a qualifying occupation and are therefore eligible to be deducted. If an employer or payor chooses to voluntarily provide information on an individual's occupation, individuals may rely on that information.
Additional Guidance and Transition Period on Specified Service Trades or Businesses (SSTBs)
The Notice also addresses the Act's requirement that qualified tips exclude any tips received by an individual in the course of a trade or business that is a specified service trade or business (SSTB), even if the individual's occupation would otherwise make them eligible for the deduction. In general, SSTBs are a trade or business where the principal asset is the reputation or skill of employees and/or owners.
Treasury and IRS recognize that additional guidance is needed to help companies and individuals determine whether a company is an SSTB and, therefore, will issue additional regulations to assist with that determination. Those regulations will be open to public comment before they are finalized.
The Notice provides a transition period, extending until January 1 of the calendar year following the issuance of final regulations. During this transition period, the IRS will treat tips as not being received from an SSTB as long as they were received while working in an occupation that customarily and regularly received tips on or before December 31, 2024.
Determining the Amount of Qualified Overtime
The Notice also provides guidance for individuals in determining their qualified overtime for 2025. To claim the deduction for qualified overtime on their individual income tax returns, individuals must first determine their qualified overtime amount using the methods provided in the Notice. The deduction remains subject to all applicable limits, including a cap of $12,500 ($25,000 for joint filers) and a phase out of the deduction for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).
As a first step, the Notice advises individuals to determine whether they are covered under the Fair Labor Standards Act (FLSA) or whether they are "exempt." Individuals who are exempt from FLSA are generally ineligible for qualified overtime. Some general examples of FLSA-ineligible employees include salaried individuals, executives, administrative personnel, professional employees, outside sales, and highly compensated employees. While these employees may be eligible for overtime under state law or receive premium pay for other reasons, those amounts would not be considered qualified overtime under the Act.
The Notice further acknowledges the guidance previously provided in Notice 2025-62 that employers and payors are not required to provide a separate accounting of qualified overtime for tax year 2025. Accordingly, the Notice states that all individuals should make a "reasonable effort" to determine if they are FLSA-eligible and, if so, the amount of their 2025 qualified overtime.
The Notice provides several options that individuals may use to calculate their 2025 qualified overtime. If an individual receives a Form W-2 or Form 1099-series which includes qualified overtime compensation, they can use the reported amount to assist in claiming their 2025 individual tax deduction (even if the qualified overtime is not displayed separately) and can base the determination of the amount of qualified overtime compensation on other documentation such as earnings or pay statements, invoices, or similar statements that support the determination. Individuals who had multiple employers or payors during 2025 may use different methods for each employer or payor.
For individuals who received overtime compensation in 2025 and did not receive reported amounts on their Form W-2 or Form 1099-series, the Notice provides the following reasonable methods for individuals to determine their qualified overtime amounts for 2025:
Scenario |
Reasonable Method for Calculating 2025 Qualified Overtime |
1. Individuals who are paid overtime at a rate of 1.5X their regular rate for hours worked over 40 hours in a workweek, and receive a separate accounting statement (i.e., pay statement, written statement, or other) which specifically identifies the "half" portion of the 1.5X above (the FLSA Overtime Premium) for the full 2025 year |
Individuals may use the amount provided on the separate accounting to assist in claiming the deduction on their 2025 individual tax return. |
2. Individuals who are paid overtime at a rate of 1.5X their regular rate for hours worked over 40 hours in a workweek, and receive a separate accounting statement that does not separately account for the FLSA Overtime Premium, but does include an entry showing the full amount of overtime compensation including both the FLSA Overtime Premium and the individual's regular wages for hours worked over a 40-hour workweek paid during the year |
Individuals may use one-third of the full amount of overtime compensation reported on the statement to assist in claiming the deduction on their 2025 individual tax return. |
3. Individuals who are paid at an overtime rate greater than 1.5X their regular rate for hours worked in excess of 40 hours in a workweek (e.g., California double time pay), and receive a separate accounting statement that specifically identifies the portion in excess of the individual's regular rate for the full 2025 year |
Individuals may approximate the FLSA Overtime Premium by multiplying the amount by an appropriate fraction (e.g., if overtime is paid at a rate of 2x the regular rate, the appropriate fraction is one-half) and use the resulting total amount to assist in claiming the deduction on their 2025 individual tax return. |
4. Individuals who are paid at an overtime rate greater than 1.5X their regular rate for hours worked in excess of 40 hours in a workweek (e.g., California double time pay), and receive a statement that does not specifically identify the FLSA Overtime Premium but does include the year-to-date total of overtime paid at a rate greater than 1.5X their regular rate combined with their regular wages for the hours worked over 40 in a workweek |
Individuals may approximate the FLSA Overtime Premium by multiplying the amount by an appropriate fraction (e.g., if overtime is paid at a rate of two times the regular rate, the appropriate fraction is one-fourth) and use the resulting amount to assist in claiming the deduction on their 2025 individual tax return. |
5. If the method for determining the amount of qualified overtime compensation in either scenario 2 or 4, above, would result in underestimating the individual's qualified overtime compensation. This situation could occur if an individual receives compensation (such as a nondiscretionary bonus) that increases their rate of pay for overtime compensation |
Individuals may adjust the method described in the paragraph to take the difference into account. |
6. If the individual is paid overtime compensation at a rate described above but does not receive any statement covering either 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 |
Individuals may use a reasonable method that takes into account:
A reasonable method includes requesting information from the employer or payor and using the information provided to calculate the deduction. |
7. If an employer or payor satisfies the requirements under Section 7 of the FLSA by operation of a special exception (including, but not limited to, public sector employees in fire protection and law enforcement, employees of a political subdivision of a State or an interstate governmental agency who receive compensatory time off in lieu of cash, and employees of hospitals or certain residential care facilities) |
Individuals must compute the amount of overtime compensation by operation of the different qualifying federal overtime rules used in the relevant exception that apply to the individual and may use any reasonable method contained in the Notice that takes those alternative overtime rules into account. |
The Notice further clarifies that in all cases, if claiming a deduction related to qualified overtime compensation, individuals must maintain copies of any documents they rely on in claiming the deduction in accordance with all other IRS rules.
Additional Guidance Anticipated
As noted above, the Notice announced that Treasury and IRS will issue regulations providing guidance on determining whether a company is a specified service trade or business (SSTB). In addition to these SSTB regulations, additional guidance is expected in other areas:
- Finalized 2026 Forms – The IRS released drafts of 2026 Form W-2, Form 1099-K, 1099-MISC, and 1099-NEC, as well as Form W-4. These forms remain preliminary and are subject to change until the IRS issues final versions.
- Guidance on Qualified Overtime and Qualified Tips for 2026-28 – Guidance released to date has primarily focused on the 2025 transition year. Additional guidance is expected to answer open questions regarding administration of the new deductions from 2026 through 2028, when they are currently scheduled to expire.
- Final regulations on Tipped Occupations and Qualified Tips – Proposed regulations were issued on September 19, 2025, with comments due in mid-October. Companies should monitor for issuance of final regulations which could make changes to occupations, TTOCs, and other qualified tip requirements. In the meantime, companies can rely on guidance included in the proposed regulations.
ADP Compliance Resources
ADP maintains a staff of dedicated professionals who carefully monitor federal and state legislative and regulatory measures affecting employment-related human resource, payroll, tax and benefits administration, and help ensure that ADP systems are updated as relevant laws evolve. For the latest on how federal and state tax law changes may impact your business, visit the ADP Eye on Washington Web page located at www.adp.com/regulatorynews.
ADP is committed to assisting businesses with increased compliance requirements resulting from rapidly evolving legislation. Our goal is to help minimize your administrative burden across the entire spectrum of employment-related payroll, tax, HR and benefits, so that you can focus on running your business. This information is provided as a courtesy to assist in your understanding of the impact of certain regulatory requirements and should not be construed as tax or legal advice. Such information is by nature subject to revision and may not be the most current information available. ADP encourages readers to consult with appropriate legal and/or tax advisors. Please be advised that calls to and from ADP may be monitored or recorded.
If you have any questions regarding our services, please call 855-466-0790.
ADP, Inc.
One ADP Boulevard, Roseland, NJ 07068
adp.com
Updated on November 26, 2025
