New Tip And Overtime Deductions - Guidance for Employees
New Tip and Overtime Deductions – Guidance for Employees
MEMO: Important Information About New Tip and Overtime Deductions for 2025
This memo provides essential information about new federal tax deductions for tips and overtime pay
that may help reduce your 2025 taxable income. Please read this memo carefully and keep it with
your tax records.
1. Background: New Tip and Overtime Deductions for 2025
Starting with the 2025 tax year, a new law allows certain employees to deduct qualified tips and
overtime pay from their federal taxable income:
• Tip Deduction: If you work in a job where voluntary tipping is customary (such as restaurants,
salons, or ride-sharing), you may be able to deduct up to $25,000 of your reported tip income from
your taxable income.
• Overtime Deduction: If you are eligible for overtime pay, you may be able to deduct up to
$12,500 of the “overtime premium” (the extra 50% pay for hours worked over 40 in a week) from your
taxable income.
• These deductions are available for 2025 through 2028 and may be reduced or eliminated for
higher-income earners.
2. Employer Reporting: No Extra Information Required for 2025
For 2025, your employer is not required to provide you with extra tip or overtime information on
your W-2 form for these new deductions. The forms and withholding rules remain the same for this
year. New reporting rules will begin in 2026.
3. Your Responsibility: Calculating Your Own Deductions
You are responsible for calculating your own tip and overtime deductions when you file your 2025
tax return:
• For tips: Only tips from jobs where voluntary tipping was common before 2025 and tips that you
reported to your employer count for the deduction.
• For overtime: Only the “extra” pay you receive for working overtime (the 50% premium, not the
whole overtime amount) qualifies.
• There are yearly limits and income rules that might reduce your deduction.
4. IRS Calculation Examples for 2025
Tips Examples:
• Example 1. Employee A is a restaurant server. The amount reported in A’s Form W-2, box 7, is
$18,000 in social security tips. A did not report any additional tips on Form 4137. A may use
$18,000 in determining the amount of qualified tips for tax year 2025.
• Example 2. Employee B is a bartender. During tax year 2025, B reports $20,000 in tips to B’s
employer on Form 4070. B’s 2025 Form W-2 reports $200,000 in box 1, an amount in excess of the
social security wage base, and $15,000 in box 7. Additionally, B reports $4,000 of unreported tips
on Form 4137, line 4, and includes this amount in income on B’s Form 1040. B may use either the
$15,000 in box 7 of the Form W-2, or the $20,000 of tips reported to B’s employer on Forms 4070 in
determining the amount of qualified tips for tax year 2025. Regardless of the option chosen, B may
also include the $4,000 of unreported tips from Form 4137, line 4, in determining the amount of
qualified tips.
Overtime Examples:
• Example 1. Individual A is paid “one and one-half times” for overtime. A’s pay stub shows a
total “overtime” amount of $15,000 (which is the FLSA Overtime Premium combined with the portion of
the individual’s regular wages for the hours worked over 40 in a workweek). For purposes of
determining the amount of qualified overtime compensation received in tax year 2025, the individual
may include $5,000 (the FLSA Overtime Premium, computed by dividing $15,000 by 3).
• Example 2. Individual B’s employer has a practice of paying overtime at a rate of two times an
employee’s regular rate of pay, and Individual B was paid $20,000 in overtime pay under that
practice, although 29 USC § 207 only requires Individual B’s employer to pay at one and one-half
times the employee’s regular rate. Individual B’s last pay stub for 2025 shows “overtime premium”
of $10,000 paid in 2025 (which is Individual B’s overtime premium paid at a rate of two times the
individual’s regular rate). For purposes of determining the amount of qualified overtime
compensation received in tax year 2025, Individual B may include $5,000 ($10,000 divided by 2).
• Example 3. Assume the same facts as in example 2, except that Individual B’s pay stub shows a
total “overtime” amount of $20,000 (which is Individual B’s overtime premium paid at a rate of two
times the individual’s regular rate of pay, combined with the portion of the individual’s regular
wages for the hours worked over 40 in a workweek). For purposes of determining the amount of
qualified overtime compensation received in tax year 2025, Individual B may include $5,000 (the
FLSA Overtime Premium, computed by dividing $20,000 by 4).
• Example 4. Individual C 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. For purposes
of determining the amount of qualified overtime compensation received in tax year 2025, Individual
C may include $5,000 ($15,000 divided by 3).
• Example 5. Individual D 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, Individual D was paid $4,500 in wages for compensatory time off taken in accordance with
section 207(o). For purposes of determining the amount of qualified overtime compensation received
in tax year 2025, Individual D may include $1,500, one-third of these wages, for purposes of
determining qualified overtime compensation under section 225(c).
Key Reminders:
• These deductions are claimed when you file your tax return—they do not reduce your paycheck
during the year.
• Only tips you report to your employer and overtime required by federal law count.
• Keep good records of your tips and overtime hours.
• Your final pay stub issued in 2025 might include information that could be important for your
deduction calculations.
This memo is provided for informational purposes only and should not be considered tax advice. We
recommend that you refer to IRS Notice 2025-69 or consult your own tax advisor or preparer for
guidance specific to your situation.