Breaking down the OBBBA: New IRS guidance on qualified tip and qualified overtime deductions

The IRS has issued Notice 2025-69, providing interim guidance on individual tax deductions for tip income (“No Tax on Tips”) and overtime compensation (“No Tax on Overtime”) introduced in the One Big Beautiful Bill Act (OBBBA). This notice, issued November 21, 2025, outlines how workers can claim these deductions for the 2025 tax year.

The deductions – effective as of January 1, 2025 – apply to “qualified” tip income and overtime pay. The term “qualified” is critical. It defines amounts eligible for the deduction from the gross amount for tips or overtime compensation reported by the payee in 2025. They should report these qualified deductions on their 2025 income tax return, and can claim them regardless of whether they itemize.

The IRS previously indicated that, due to these deductions being retroactive, it wouldn’t require employers to report qualified tip income and qualified overtime compensation for 2025 – but will in 2026. Since the retroactive application of these guidelines is complex, the IRS is allowing payees to use a “reasonable method” when determining the amounts of qualified tips or overtime deduction for 2025. Notice 2025-69 provides guidance on how payees can calculate and report these amounts, offering interim clarity. Again, employers don’t need to separately account for these amounts until 2026, and the IRS has granted penalty relief for 2025 to ease this transition.

Qualified tip deduction or “no tax on tips”

2025 represents a transition year in the rollout of the new qualified tip deduction. The IRS has confirmed that businesses don’t need to separately account for tips on 2025 year-end reporting forms during this period. The IRS has not yet modified standard forms – including the W-2, 1099-NEC, 1099-MISC or 1099-K – to reflect the new reporting requirements, leaving payees to rely on interim guidance.

Employee reporting options

To satisfy 2025 reporting needs, cash tips must be included in an employee’s W-2, even if this income is not separately itemized. Then, one of the following calculation options must be used to determine the qualified tips for 2025:

• Use the total amount of Social Security tips reported in Box 7 of Form W-2.
• Use the total amount of tips reported by the employee to the employer on Forms 4070 (or equivalent monthly form).
• If an employer voluntarily reports employee cash tips in Box 14 of Form W-2 or on a separate statement, use this figure.
• Employees may also include any amount listed on line 4 of the 2025 Form 4137 filed with the employee’s 2025 tax return (and included as income on that return). 
• Non-employee payees, such as contractors or gig workers, can meet their reporting requirements by reporting all cash tips on Forms 1099-NEC, 1099-MISC or 1099-K. They must then calculate qualified tips using corroborating documents such as receipts, point-of-sale system reports, daily tip logs or third-party settlement organization records. They may consult with the payor to assist.

Occupation requirements

Payees must determine whether they earned tips in an occupation that customarily and regularly received tips on or before December 31, 2024. While this occupation information may not appear on the 2025 Form W-2, some employers may choose to provide employee occupation or other relevant information to them using Box 14 of Form W-2, which the payee can rely on. For 2025, non-employee payees have the same occupation eligibility requirements. The IRS has referenced IR-2025-92, released September 19, 2025, as containing a list of qualifying occupations.

Trade or business requirement

In addition to meeting the occupation requirement, payees must work in specific trades or businesses to qualify. They must earn tips through trades or businesses that aren’t a “specified service trade or business” (SSTB). This SSTB designation hasn’t received much attention, and payees and employers haven’t had to interpret rules like this before. Acknowledging this complexity, the IRS stated that payees need more guidance and granted a special exception to employee or non-employee payees for 2025. The IRS explained:

“Accordingly, in the interest of sound tax administration, there will be a transition period for purposes of IRS enforcement and administration with regard to the specified service trade or business (SSTB) requirement. Specifically, until January 1 of the first calendar year following the issuance of final regulations regarding the determination of whether a trade or business is a specified service trade or business for purposes of section 224 and associated employer information reporting, the IRS will treat the employee as having received tips in the course of a trade or business that is not a specified service trade or business if the employee is in an occupation that customarily and regularly received tips on or before December 31, 2024, as provided by the Secretary.”

This IRS transition rule is favorable to payee taxpayers. A payee whose occupation historically earned tips won’t need to worry about the SSTB requirement for the 2025 tax year. They likely won’t for 2026 either, unless final regulations are issued before January 1, 2026, which seems unlikely.

The IRS also provided three useful examples in Notice 2025-69 that are helpful to individuals reporting the qualified tip deduction in 2025.

Qualified overtime compensation deduction or “no tax on overtime”

While the IRS issued proposed regulations in September 2025 for the new “No Tax on Tips” deduction, it has offered little details on the “No Tax on Overtime” deduction until now. IRS Notice 2025-69, as the first substantial guidance on this new deduction, is essential.

Compensation requirement

This new deduction applies only to overtime compensation that exceeds the payee’s regular pay rate. To qualify, an individual covered by the Fair Labor Standards Act (FLSA) must earn the compensation. FLSA-ineligible employees, generally not paid overtime, may be ineligible due to their industry, profession, jurisdictional rules or employment contract provisions. Payees must make a reasonable effort to determine if they are FLSA-eligible, which impacts whether all or part of their overtime compensation is deduction-eligible. They may need to consult with employers, payors or other advisors in complex cases.

Reporting for 2025

For the 2025 tax year, employers and payors don’t need to provide a separate accounting of qualified overtime compensation to payees. Some may choose to do so voluntarily, either by reporting the amount in Box 14 of the employee’s Form W-2 or on a separate statement. In these cases, the payee can treat this separate accounting requirement as satisfying their eligibility requirements and use this amount provided for their deduction.

If no qualified overtime compensation amount is provided, Notice 2025-69 explains how payees can determine it themselves. The process involves two steps:

• Confirm inclusion in payee’s statements: All overtime pay must be reflected in the payee’s 2025 statements, such as Form W-2, Forms 1099-NEC or 1099-MISC.
• Apply IRS-approved methods: Next, payees may use one of seven methods outlined in the notice to determine the portion of overtime pay considered deductible.

These seven methods are each considered a “reasonable method,” with Notice 2025-69 outlining common overtime pay arrangements and how the payee can compute the eligible amount:

• FLSA requirement: Overtime must be paid at 1.5 times the regular rate of pay. 
• Deduction limit: When overtime compensation exceeds this threshold, only the additional 50% above the regular rate qualifies for this new deduction. 
• Examples: The notice includes examples of how to calculate qualified overtime compensation when the rate exceeds 1.5 times the regular rate.
  • To calculate this, payees should identify:
    • Total overtime hours worked during the year
    • Rate of pay for each overtime hour

Conclusion

Notice 2025-69 provides critical transition relief for payee taxpayers who receive compensation that includes tips or overtime income and qualify for these new deductions. Complexities and uncertainties remain. Determining eligibility – whether through occupation requirements, SSTB limitations or FLSA status – requires careful evaluation.

Employees and other payees should consult with employers, other payors or trusted advisors to ensure all rules are followed and qualified amounts are calculated correctly. Organizations should consider how to assist payees now and ensure their systems are prepared for potential expanded requirements. Consult your Sikich tax advisor for deeper guidance.

This article is part of our continued analysis of the OBBBA. Visit the OBBBA hub for all of our coverage.

About our authors

Tom Bayer, CPA, CExP, has specialized expertise in the areas of business succession planning, tax planning and compliance, and business advisory. He has deep experience providing a range of accounting, tax, and business advisory services to commercial clients across industries.

Jim Brandenburg, CPA, MST, possesses extensive experience and knowledge in corporate and partnership tax law, mergers and acquisitions, and tax legislation. His expertise includes working with owners of closely held businesses to identify tax planning opportunities and assist them in implementing these strategies.

Nathan Isenberg, CPA, CFP, has specialized expertise in the areas of small business advisory, tax planning and compliance. He has deep experience providing a range of accounting, tax and business advisory services to commercial clients across industries, focusing in professional services companies.

Tim Beine, CPA, has over 25 years of accounting and tax experience, serving individuals, C-corporations, S-corporations, LLCs and partnerships. He specializes in Quickbooks training, audits, financial statement preparation and tax preparation.