IRS Guidance: Determining Your OBBBA Deduction for Tips & Overtime
Published on by Chaleise Fleming in Tax Services
The IRS has released additional guidance on how individual taxpayers can determine their deduction amounts for qualified tips and overtime wages under the OBBBA for 2025. This update is important because Forms W-2 1099 forms will not be modified for 2025 to reflect these new deductions.
Refresher
As noted in our earlier post, OBBBA introduced two major above-the-line deductions: one for qualified tips, and one for qualified overtime compensation. These provisions are temporary and available for tax years 2025 through 2028.
IRS guidance on estimating qualified tips and overtime
Estimating qualified tips
Employees can calculate their qualified tips earned during 2025 by using:
- Box 7 of Form W-2 (Social Security Tips)
- Form 4070 (Employee’s Report of Tips to Employer) or a similar substitute form
- Box 14 of Form W-2 if your employer voluntarily reports cash tips or provides a statement of cash tips
- Line 4 of Form 4137 (Social Security and Medicare Tax on Unreported Tip Income)
Non-employees may deduct qualified tips if included and reported on Form 1099-MISC, Form 1099-NEC, or Form 1099-K. Non-employees can determine and calculate their qualified tips using receipts, third-party records, and earnings statements.
Taxpayers are responsible for determining if their occupation qualifies for the tip deduction.
The IRS has also provided transition relief in 2025 for employees trying to determine if their tips were received in a specified service business. If you are in an occupation that regularly received tips on or before December 31, 2024, you may claim the deduction even if your employer is a specified service business. This transition relief will be effective until final regulations are issued.
Estimating qualified overtime
For 2025, the “separate reporting requirement” for overtime wages is satisfied if qualified overtime is included on Form W-2, Form 1099-NEC, or Form 1099-MISC. Employees can use pay stubs, invoices, earnings support, or other similar documents and apply a reasonable method to calculate their qualified overtime for 2025.
As a reminder, overtime paid to employees not covered by the Fair Labor Standards Act (FLSA) does not qualify. For 2025, the IRS is allowing people to make a “reasonable effort” to determine their FLSA-eligible status. This effort can include asking your employer.
Looking ahead
We’ll continue to keep you updated as the IRS issues more guidelines and finalizes the Form W-2 and 1099 changes for 2026. In the meantime, you may be interested in our coverage of other aspects of the OBBBA, or explore success stories about how we’ve helped our clients. If you have a question about how the OBBBA may impact you, contact us today for a free consultation with one of our top tax pros – as always, we’re here to help.
