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The IRS has provided interim guidance on the deductions for qualified tips and qualified overtime compensation under the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21). For tax year 2025, employers and other payors are not required to separately account for cash tips or qualified overtime compensation on Forms W-2, 1099-NEC, or 1099-MISC furnished to individual taxpayers.
The IRS has provided interim guidance on the deductions for qualified tips and qualified overtime compensation under the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21). For tax year 2025, employers and other payors are not required to separately account for cash tips or qualified overtime compensation on Forms W-2, 1099-NEC, or 1099-MISC furnished to individual taxpayers. The notice addresses determining the amount of qualified tips and qualified overtime compensation for TY2025 and provides transition relief from the requirement that qualified tips must not be received in the course of a specified service trade or business.
Background
OBBBA added deductions for qualified tips under Code Sec. 224 and qualified overtime compensation under Code Sec. 225. Both deductions are available for TYs beginning after December 31, 2024, and ending before January 1, 2029.
Deduction for Qualified Tips
Code Sec. 224(b)(2) limits the deduction amount based on a taxpayer’s modified adjusted gross income (MAGI). The deduction phases out for taxpayers with MAGI over $150,000 ($300,000 for joint filers). Qualified tips are defined as cash tips received by an individual taxpayer in an occupation that customarily and regularly received tips on or before December 31, 2024. Only cash tips that are separately accounted for on the Form W-2 or reported on Form 4137 are included in calculating the deduction.
Employers are not required to separately account for cash tips on the written statements furnished to individual taxpayers for 2025. Cash tips must be properly reported on the employee’s Form W-2. The employee is responsible for determining whether the tips were received in an occupation that customarily and regularly received tips on or before December 31, 2024.
For non-employees, cash tips must be included in the total amounts reported as other income on the Form 1099-MISC, or payment card/third-party network transactions on the Form 1099-K furnished to the non-employee.
Deduction for Qualified Overtime Compensation
Code Sec. 225(b)(1) limits this deduction amount not to exceed $12,500 per return ($25,000 in the case of a joint return) in a tax year. The deduction phases out for taxpayers with MAGI over $150,000 ($300,000 for joint filers). Qualified overtime compensation is the FLSA overtime premium, which is the additional half-time payment beyond an employee's regular rate for hours worked over 40 per week under FLSA section 207(a), as reported on a Form W-2, Form 1099-NEC, or Form 1099-MISC. The notice provides calculation methods for determining the FLSA-required portion when employers pay overtime at rates exceeding FLSA requirements.
A separate accounting of qualified overtime compensation will not appear on the written statement furnished to an individual for 2025. Individual taxpayers not receiving a separate accounting of qualified overtime compensation must determine whether they are FLSA-eligible employees, which may include asking their employers about their status under the FLSA. The notice provides reasonable methods and examples for determining the amount of qualified overtime compensation, including approaches for employees paid at rates exceeding time-and-a-half and special rules for public safety employees.
IR-2025-114