OBBBA Update: IRS Expands Eligibility for 2025 Tip & Overtime Deductions
(Updated with IRS guidance available as of 11/26/2025)
The IRS has released new guidance that provides employers and employees with additional time, flexibility, and clarity regarding how the One Big Beautiful Bill Act (OBBBA) applies for the 2025 tax year. The following notices are now available:
IRS Notice 2025-62— Relief from Certain Penalties Related to Information Reporting Required in Connection with No Tax on Tips and Overtime
IRS Notice 2025-69— Guidance for Individuals Who Received Qualified Tips or Qualified Overtime Compensation in 2025
IRS Notice 2025-62: Penalty Relief for Employers in 2025
Because employers have not historically tracked the specific types of tip and overtime categories required under OBBBA, the IRS acknowledges that payroll systems and operational processes need time to adjust. For 2025, the IRS is providing transition relief:
Employers are not required to separately report tip and overtime amounts for 2025.
There will be no penalties for failing to provide separate reporting this year.
Separate reporting of tips and overtime will be required beginning in 2026, and a preview of the upcoming requirements appears on the draft 2026 Form W-2.
No Changes to 2025 Forms W-2 or 1099s
The IRS confirmed that no new reporting boxes or fields will be added to:
W-2
1099-NEC
1099-MISC
1099-K
What this means: Employers will continue following the same reporting rules they have used in prior years. However, employees will carry increased responsibility for maintaining their own records when claiming 2025 deductions.
How Employees Determine Their 2025 Deduction Amounts
Because employers do not need to provide separate tip and overtime breakdowns in 2025, employees may calculate their own deductible amounts using a reasonable estimate based on available documentation.
The IRS advises employees to reference:
Paystubs
Form 4070, Employee’s Report of Tips to Employer
Form 4137, Social Security and Medicare Tax on Unreported Tip Income
POS system logs
Earnings statements
Timesheets
Other documentation supplied by the employer
Recommendation: Workers should consult with a tax professional to ensure they report accurate tip and overtime deductions on their 2025 individual tax returns.
IRS Notice 2025-69: Key Updates for Employers and Employees
Issued on November 21, 2025, Notice 2025-69 provides long-awaited guidance to help individuals file their 2025 personal tax returns. The notice also offers both employers and employees clearer direction on how OBBBA rules apply this year.
The IRS is granting additional transition relief, including:
Temporary expansion of eligibility for certain deductions
Flexibility to use reasonable estimates for 2025
Delayed enforcement of restrictions that otherwise would have narrowed who qualifies
Who Can Claim the Tip Deduction in 2025
OBBBA allows employees who receive qualified tips in an occupation that customarily and regularly received tips before December 31, 2024, to deduct up to $25,000 of those tips from federal taxable income on their personal tax return.
The original law would have excluded workers in “specified service trades or businesses” (SSTBs), such as:
Healthcare
Law
Consulting
Financial services
Under Notice 2025-69, this exclusion is delayed until final regulations are issued. Therefore, employees working in SSTBs may still claim the tip deduction in 2025 as long as the tips were received in an occupation that customarily and regularly received tips.
A preliminary list of qualifying occupations is available on the Department of Treasury’s website: https://home.treasury.gov/system/files/136/Tipped-Occupations-Detailed-8-27-2025.pdf (pending final IRS approval).
What this means: More employees will qualify for the 2025 tip deduction, regardless of whether their employer operates in an SSTB, provided the employees occupation regularly received tips.
Definition of Qualified Tips
Proposed IRS regulations define qualified tips as amounts that meet all of the following criteria:
Qualified tips must be paid in cash or an equivalent medium, such as check, credit card, debit card, gift card or another form of electronic settlement denominated in cash.
Qualified tips must be received from customers or, in the case of an employee, through a mandatory or voluntary tip-sharing arrangement, such as a tip pool.
Qualified tips must be paid voluntarily by the customer and not be subject to negotiation. Qualified tips do not include some service charges. For instance, in the case of a restaurant that imposes an automatic 18% service charge for large parties and distributes that amount to waiters, bussers and kitchen staff; if the charge is added with no option for the customer to disregard or modify it, the amounts distributed to the workers from it are not qualified tips.
Any amount received for illegal activity is not a qualified tip.
Overtime Deduction Explained for 2025
OBBBA created a $12,500 overtime deduction, but the statute only permits this deduction for overtime premium paid under federal FLSA rules, not overtime premiums associated with:
Union contracts
State labor laws
Employer policies
The IRS has clarified:
Only FLSA overtime qualifies.
The deduction applies only to the 0.5× premium portion of FLSA overtime.
Employees must make a reasonable effort to determine whether they are FLSA-eligible and whether the overtime they received qualifies.
How Employees Estimate the “Half-Time” Portion of FLSA Overtime
Most employers do not separately track or report the half-time portion of overtime (the premium component above the regular rate). Since the OBBBA overtime deduction applies only to the 0.5 x premium portion, employees may need help estimating this amount for 2025. The IRS allows employees to rely on reasonable methods to calculate the overtime premium based on the type of overtime they received if the 0.5x premium is not separately identified on the statements and there are a few examples available on the IRS website: https://www.irs.gov/newsroom/treasury-irs-provide-guidance-for-individuals-who-received-tips-or-overtime-during-tax-year-2025
If overtime is paid at 1.5x regular rate: Take total 2025 overtime earnings and divide by 3 to estimate the portion attributable to the 0.5 premium.
If overtime is paid at 2x regular rate (double time): Divide total 2025 double-time earnings by 4 to estimate the portion attributable to the 0.5 premium.
If you have weighted average overtime and overtime (straight) as a separate line item on your check, the 0.5 premium is already split out in the weighted average overtime code and no further calculation is required.
Special Scenarios:
Employee works in law enforcement and is paid $15,000 of total annual overtime pay on a “work period” basis of 14 days that complies with section 207(k) of the FLSA. The employee may divide the total overtime by 3 and claim $5,000 of qualified overtime on his tax return.
Employee works for a State or local government agency that gives compensatory time at a rate of one and one-half hours for each overtime hour worked under 29 USC 207(o). In 2025, the employee was paid wages of $4,500 with respect to compensatory time off taken in accordance with section 207(o). For purposes of determining the qualified overtime compensation received in tax year 2025, the employee may include $1,500, one-third of these wages for purposes of determining qualified overtime compensation under section 225(c).
These simplified calculations work because the regular-rate and premium components retain predictable ratios under FLSA overtime rules. Although not a substitute for employer-provided reporting, they are acceptable under the IRS’s 2025 transition relief in Notice 2025-69.
What Employers Should Do Now
Although employers receive significant relief for 2025, they should begin preparing for future compliance.
Strongpay recommends:
Identify employees who regularly receive tips or FLSA overtime.
This will help determine who needs support or education.Communicate with employees.
Workers may need help understanding which documents to retain for their 2025 personal tax filings. Employees receiving overtime will need clarity what the overtime amount on their paystubs represents.Assign preliminary TTOC (Treasury Tipped Occupation Code) classifications.
Use the Treasury’s preliminary occupation list: https://home.treasury.gov/system/files/136/Tipped-Occupations-Detailed-8-27-2025.pdf Once the IRS releases the final occupation list, the payroll system will be properly updated and the codes can then be added to employee profiles for 2026 Form W-2 reporting.Ensure timekeeping and payroll systems can track tip and overtime categories accurately.
While separate reporting is not required for 2025, accurate internal records support employees’ deduction calculations.
Specific reporting for tips and FLSA overtime will be required for 2026, so review and follow up if changes in the payroll setup are necessary before 2026 payrolls are processed.
Prepare for future regulatory changes.
Restrictions on SSTBs and stricter overtime definitions are delayed, not eliminated.
Strongpay’s Perspective
The IRS has clearly emphasized guidance for 2025 including transition relief over strict enforcement for 2025, which is a positive development for both employers and workers.
Looking ahead to 2026, Strongpay recommends proactively preparing your payroll for the likely return of the original statutory rules, particularly the requirement that only FLSA overtime counts toward the overtime deduction. Employers who distinguish FLSA overtime from other overtime categories now will be better positioned for seamless compliance in 2026. However, keep in mind that the final IRS guidance for qualified tip occupations, definitions of tips, definition of overtime, and how the rules will be applied in 2026 and going forward is yet to be released.
Strongpay will continue to monitor closely IRS updates and will provide further guidance as final regulations are released.
Need Help Identifying Affected Employees?
Strongpay can provide reporting to help you identify:
Employees who regularly receive tips
Employees working overtime under any rule
Positions or departments likely to be affected
To enable these reports for your organization, contact your Strongpay service representative or email payroll@strongpay.com.