The IRS has released Notice 2025‑69, clarifying how employees can claim new deductions on their 2025 tax returns for income earned through tips and overtime pay.

This temporary deduction, authorized by the American Worker Relief Act of 2024, allows:

• Up to $25,000 in deductions for tipped income
• Up to $12,500 in deductions for qualified overtime compensation
• Deductions phase out starting at $150,000 for single filers and $300,000 for joint filers

 

Key takeaway for employees: These deductions apply even if tips or overtime aren’t separately reported on a W‑2 or 1099. Instead, the IRS will accept employer tip reports, amounts from Form 4137 (for unreported tips), or employee-kept records.

 

Example: A server receives $15,000 in employer‑reported tips (shown on the W‑2), plus $3,000 in unreported cash tips. The full $18,000 may be eligible for deduction on Schedule 1‑A.

 

Overtime deduction: If an employee earns $10,000 in total overtime but only $2,000 is the premium portion, only that $2,000 is deductible — unless the payroll provider breaks it down more clearly.

 

Important for employers: No changes to Form W‑2 or payroll systems are required at this time, but providing clear tip and overtime summaries can significantly help employees take advantage of these deductions.

 

These provisions apply to tax years 2025 through 2028.

 

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Under U.S. Treasury regulations, any tax advice in this communication is not intended or written to be used to avoid IRS penalties. Tzinberg & Associates provides this information for general guidance only. It does not constitute tax advice, accounting services, investment advice, or professional consulting. Consult a professional adviser before making decisions or taking action, as the information is provided "as is" without any warranties regarding its completeness, accuracy, or timeliness.