IRS Notice 2025-69: How the new deductions for tips and overtime work in 2025

On Nov. 21, 2025, the Internal Revenue Service (IRS) issued Notice 2025-69 (the "Notice"), answering a few practical questions left open by the One Big Beautiful Bill Act (OBBBA) regarding tax and overtime income. The Notice explains how individual taxpayers can claim the new deductions for qualified tips and qualified overtime compensation on their 2025 tax returns despite the fact that the reporting system is currently lacking.

The OBBBA added two new sections. (All section references are to the Internal Revenue Code of 1986, as amended, and the regulations thereunder.) Section 224 allows a deduction for "qualified tips." Section 225 allows a deduction for "qualified overtime compensation." Both deductions apply to tax years beginning after Dec. 31, 2024, and ending before Jan. 1, 2029. On paper, the statutory structure is straightforward: The deductions are above-the-line, subject to dollar caps and income phase-outs. In practice, however, the first year presents a more basic problem. For tax year 2025, taxpayers will not receive tax forms that clearly identify the deductible amounts.

That is the gap Notice 2025-69 is designed to fill.

The IRS has already confirmed that the 2025 versions of Forms W-2 and the various Forms 1099 need not separately report qualified tips or qualified overtime. Employers are not required to provide supplemental statements. In other words, there is no box on the form that solves this for you. CPAs will need to reconstruct the numbers from existing records.

Notice 2025-69 confirms that this is acceptable and explains how to do it.

2025 is a transition year, not a shortcut

The OBBBA amended several information-reporting provisions to require separate reporting of qualified tips and qualified overtime compensation. Once those changes are fully implemented, these deductions should become more mechanical.

That is not the world we are in for 2025.

For this filing season, deductions must be reconstructed, not extracted. The IRS recognizes this and allows taxpayers to rely on reasonable methods supported by existing documentation. That flexibility is intentional, but it is not open-ended. Consistency and substantiation still matter.

From a compliance standpoint, the message is straightforward--use what exists, apply it reasonably, and be able to explain it.

Qualified tips: Focus on the role, then the records

Section 224 allows eligible taxpayers to deduct up to $25,000 of qualified tips, subject to a modified adjusted gross income phase-out beginning at $150,000 for single filers and $300,000 for joint filers. The deduction applies only to tips received in an occupation that customarily receives tips before Jan. 1, 2025.

The statute also excludes tips received in the course of a specified service trade or business (SSTB). For 2025, however, the Notice provides transition relief. The IRS will treat tips as received in a non-SSTB if the individual works in a traditionally tipped occupation, regardless of how the employer's overall business might otherwise be classified. Until final regulations are issued, the analysis centers on what the worker does, not how the employer is categorized.

That matters in practice. A server or bartender does not lose the deduction simply because the employer operates through a complex service structure. The role drives the analysis.

On the reporting side, the IRS is clear. Because qualified tips will not be separately reported on Forms W-2 or 1099 for 2025, taxpayers may rely on existing records. This includes Social Security tips reported on Form W-2, box 7; tips reported to the employer on internal reports such as Form 4070; point-of-sale summaries; and tips reported on Form 4137 and included in income. Independent contractors may rely on contemporaneous records such as invoices, receipts or daily tip logs.

The examples in the Notice make this concrete. If box 7 is the only reliable number, use it. If the taxpayer reported higher tips to the employer, that number may be used instead. If unreported tips were picked up on Form 4137, they can be included. For self-employed individuals, logs matter more than the Form 1099-K.

The common thread is not complexity. It is documentation.

Qualified overtime: Much narrower than clients expect

The overtime deduction under Section 225 is where most misunderstandings will arise. Only overtime compensation required by the Fair Labor Standards Act (FLSA) qualifies. And only the portion of pay that exceeds the employee's regular rate is deductible.

In plain terms, this is usually the "half" in time-and-a-half. The base hourly wage is not deductible.

The Notice draws a hard line here. Amounts paid due to state overtime laws, collective bargaining agreements, employer policy, bonuses or other arrangements do not qualify, even if paid for overtime hours. Overtime paid for hours that are not eligible for the FLSA premium does not qualify either.

A simple example illustrates the point. An employee earns $20 per hour and receives $30 per hour for overtime. Only the $10 premium may be considered, and only if the overtime is required under the FLSA. If the employer pays more because of state law or a union contract, the excess is excluded.

The deduction is capped at $12,500 for single filers and $25,000 for joint filers, with the same income phase-outs that apply to the tips deduction.

As with tips, qualified overtime will not be separately reported on Forms W-2 or 1099 for 2025. Taxpayers must rely on pay stubs, payroll summaries or timekeeping records to isolate the FLSA premium. The Notice allows this, but it also expects taxpayers to make a reasonable effort to confirm that they are FLSA-eligible. In some cases, that means confirming classification with the employer.

For CPAs, this often translates into explaining why the deductible amount is far smaller than the client expected--and documenting the calculation.

Practical takeaways for the 2025 filing season

The Notice does not lower the compliance bar. It recognizes that the information-reporting system is incomplete for 2025 and allows reasonable workarounds, but it still expects discipline. CPAs will need to identify what qualifies, reconstruct deductible amounts from real records, and be able to explain how those numbers were derived.

Client education will be critical. Many taxpayers will assume that tip income or overtime pay is now tax-free. It is not. The deductions are capped, phased out at higher income levels, and limited to specific components of pay. Managing those expectations early will avoid confusion at filing time and reduce disputes over results that appear smaller than anticipated.

Because both deductions reduce adjusted gross income, they may also affect eligibility for other tax benefits tied to income thresholds. That interaction should be part of the return analysis, not an afterthought.

Ultimately, the Notice gives practitioners what they needed for the first year of implementation: workable rules in a year when the forms do not cooperate. It allows judgment without inviting guesswork. As reporting improves in future years, this process should become more mechanical. Until then, good compliance will depend less on the forms and more on the analysis behind them.