The federal government has announced the new overtime and tip tax breaks in the One Big Beautiful Bill that can bring some changes for the filers preparing to file 2025 tax returns. IRS has issued guidance for the overtime and tips tax return for the 2025 tax year, which you can check here.
The bill has brought no tax on overtime and tips for the American workers, offering tax relief, but the IRS warns it can increase the complexity in filing tax returns for the 2025 tax year. Hence, the IRS has issued guidance on the new rules for taxpayers.
The filing gets harder because there are no separate forms for the tips or overtime reporting; the workers have to report through their records. The IRS is in the process of updating the information and instructions for the taxpayers to claim the deductions.
What is covered in the new overtime and tip tax breaks?
The OBBBA bill has brought the no tax provision on tips and overtime to offer some relief to the working class; however, it’s not necessary that all will be covered under this provision. So, before we move to the guidance of filing it, let’s understand what this provision covers and who can take advantage of it:
- No tax on tips:
- For the tax year 2025 to 2028, the workers can deduct $25,000 in tips from their taxable income and reduce their taxes. The tips involve only voluntarily paid tips; no conditions are applied, such as rewards or discounts
- The tip deduction is not allowed for workers annually earning above $150,000 (single filers) or $300,000 (for joint filers).
- The eligible tipped occupations include bakers, dancers, cooks, waitstaff, bartenders, musicians, hotel staff (housekeeping), dishwashers, barbers, nail technicians, gambling dealers, hairdressers, massage therapists, concierges, bakers, and others.
- No tax on overtime:
- From tax year 2025 to 2028, eligible taxpayers who receive the qualified overtime compensation can deduct the maximum amount of $12,500 (single filers) and $25,000 for joint filers.
- The deduction is not allowed for the workers who earn annually above the threshold of $150,000 (single filers) and $300,000 (joint filers).
- Qualified overtime compensation is the portion of the overtime pay under the FLSA act, that is, for workers working for more than 40 hours a week, which is half of that pay. For instance, if you earn $30, where $10 is the overtime compensation, then this $10 will be the qualified amount.
What do employers have to do for reporting overtime and tips?
With the tax deduction on tips and overtime, the IRS has issued the reporting requirements for employers as well, but for the tax year 2025, it is not mandatory; hence, the filing can be harder if employers do not do this:
- IRS asks employers to report the qualified overtime and tips on the employees’ W-2 Forms.
- Employers can make the qualified overtime information available on the online portal or provide written statements to the employees.
- The IRS encourages employers to provide their employees separate accounting of cash tips to help them file for the tips deduction in the 2025 tax year.
How to report tips on the tax return?
Now that you know the Forms W-2, 1099, and others will not change, and employers are not required to provide the information, you can find some difficulty in filing your deductions, but here the IRS has explained some solutions for you from the available data, such as:
- If you are a waiter with reporting tips on Form W-2 and have unreported tips on Form 4137, you can choose the reported tips as the qualified tips for the 2025 tax year.
- A bartender who has reported tips from the employers for the 2025 tax year on Forms 4070 and unreported in Form 4137 (line 4). The bartender has tips reported in Form W-2 as well. Now, it’s up to the bartender to use the tips listed on Form W-2 or Form 4070 as qualified tips for the 2025 tax return. Remember, the unreported tips will be counted regardless of what you choose.
- The travel guides who receive the tips from the third-party settlement organization can claim the deduction if they have kept the record of the tips they received from customers, to date, or the amount.
How to report the overtime on the tax return?
Here is the guidance to report qualified overtime compensation for the overtime deduction on the 2025 tax year return when the employer does not provide the statement:
- First, you should determine if you are FLSA eligible employees for the overtime deduction provision.
- You can determine your qualified overtime compensation for the 2025 tax year based on pay statements, invoices, and other documents related to your payroll.
- If you work for the state or local government with compensatory time at a rate of one and a half hours for each overtime hour, you can use your overtime wages paid to determine the qualified deduction.
- If your employer pays standard overtime, you can claim one-third of the combined amount as deductible overtime.
- If your employer pays high overtime, such as two times the regular pay, you can take the separate amount and multiply it by the right fraction, for instance, the appropriate fraction for two times the pay will be one-half.
The IRS guidance on the tips and overtime tax relief is out with the same form for the 2025 tax return, so taxpayers, start your preparation and claim the deduction to reduce your taxes.
Disclaimer: Information about new overtime and tip tax rules is for general awareness only. Official filing requirements are determined by the IRS.
