IRS Issues Notice 2025-69 on “No Tax on Tips” and “No Tax on Overtime”
The IRS has issued Notice 2025-69, providing much-needed guidance on how taxpayers should apply the new “No Tax on Tips” and “No Tax on Overtime” deductions for the 2025 tax year.
This notice is especially important because payroll and wage reporting systems will not fully reflect these changes until 2026. For 2025, Forms W-2 and 1099-K will not include separate boxes identifying qualifying tips or overtime. Notice 2025-69 bridges that gap by explaining how taxpayers may calculate and substantiate these deductions despite the temporary reporting limitations.
For tax professionals, the notice establishes a compliance framework during the transition year. For workers who earn tips or overtime, it explains how to claim the deductions correctly at filing time.
The One Big Beautiful Bill Act (OBBBA)
The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, introduced two new above-the-line deductions available for tax years 2025 through 2028:
- No Tax on Tips
- No Tax on Overtime
These provisions are designed to reduce federal taxable income for qualifying workers, subject to income thresholds and other statutory limitations.
Because these deductions are taken above the line, taxpayers do not need to itemize to benefit.
No Tax on Tips
Qualified Tips
Eligible taxpayers may deduct up to $25,000 of qualified tips per year.
Qualified tips include:
- Voluntary cash tips
- Credit-card tips
- Tips received through tip-pooling or tip-sharing arrangements
Mandatory service charges do not qualify.
Only tips earned in occupations historically recognized as tipped occupations before December 31, 2024 are eligible. The IRS is required to publish an official list of qualifying occupations by October 2, 2025. See published list of occupations here.
Income Phase-Out
The deduction phases out when Modified Adjusted Gross Income (MAGI) exceeds:
- $150,000 (single)
- $300,000 (married filing jointly)
For this purpose, MAGI generally equals Adjusted Gross Income (Form 1040, line 11) plus certain add-backs, such as:
- Tax-exempt interest
- Non-taxable Social Security benefits
- Excluded foreign earned income
Self-Employed Individuals
Self-employed taxpayers may claim the deduction up to their net income from tips, provided they are not engaged in a Specified Service Trade or Business (SSTB) as defined under IRC §199A. SSTBs are not eligible for this deduction.
Reporting and IRS Guidance
- Employers and payors must provide statements identifying tip income and the worker’s occupation
- The IRS expects transition relief for employer reporting compliance in 2025
- Separate W-2 and 1099 reporting boxes are expected in 2026
No Tax on Overtime
Qualified Overtime Compensation
Taxpayers may deduct:
- Up to $12,500 per individual, or
- $25,000 on a joint return
Only overtime compensation required under the Fair Labor Standards Act (FLSA) qualifies (e.g., time-and-a-half pay). Overtime premiums paid solely under state law or collective bargaining agreements are excluded.
Income Phase-Out
The overtime deduction phases out beginning at MAGI over:
- $150,000 (single)
- $300,000 (married filing jointly)
Reporting Requirements
- Employees: Overtime must be reported on Form W-2
- Non-employees: Reported on Form 1099 or Form 4137
Notice 2025-69 explains how taxpayers should calculate the deductible portion even though wage forms will not yet separately identify qualifying overtime in 2025.
Employer Implications
- No change to Social Security or Medicare taxes (FICA still applies)
- Federal income tax withholding continues as usual
- Employers should begin tracking overtime separately
- Payroll systems will need updates in anticipation of revised IRS reporting requirements
Why This Matters
- Estimated average tax savings:
- $1,800 for tipped workers
- $1,400–$1,750 for overtime earners
- Reduces taxable income without itemizing deductions
- Employers must prepare for new payroll and reporting requirements
Frequently Asked Questions
Is overtime pay now tax-free?
No. Social Security, Medicare, and withholding still apply. The benefit is realized as a deduction at tax filing.
Are tips still subject to FICA taxes?
Yes. The deduction applies only to federal income tax.
Planning Considerations
2025 is a transition year. Taxpayers and employers should expect evolving guidance, delayed reporting changes, and increased documentation requirements.