IRS issues guidance on tip and overtime deductions

The Internal Revenue Service and the Treasury have issued guidance for taxpayers to claim the deductions for tips and overtime pay from the One Big Beautiful Bill Act.

The two deductions were among the most widely touted provisions of the act, and had been among President Trump’s most frequently cited campaign promises in 2024.

Since the IRS has not changed Forms W-2 and 1099, which would have reported workers’ cash tips and overtime amounts, Notice 2025-69 explains how they figure out the amount of their deduction for each.

In addition, the notice provides transition relief for those who get tips as part of a specified trade or business.

Deducting tips

The IRS estimates that about 6 million workers report tipped wages, many of whom may be eligible for the OBBBA deductions for 2025 through 2028. The maximum annual deduction is $25,000, phasing out for taxpayers with modified adjusted gross income over $150,000 (or $300,000 for joint filers).

Notice 2025-69 includes examples of how the tip deduction rules work for various employees, including a restaurant server, a bartender and a self-employed travel guide.

Deducting overtime pay

For taxpayers earning overtime for tax years 2025 through 2028, they can deduct the amount that exceeds their regular rate of pay (“generally, the ‘half’ portion of ‘time-and-a-half’ compensation,” according to the IRS) up to a maximum annual deduction of $12,500 for individuals and $25,000 for joint filers.

Like the tip deduction, the overtime deduction phases out for those with MAGI over $150,000, or $300,000 for joint filers.

Because the Fair Labor Standards Act exempts some employees from the overtime rules, the guidance offers a number of examples of how to calculate the deductible portion of overtime pay, depending on how it is reported (as an “overtime premium,” for instance, or as total overtime; the rate of overtime pay (time-and-a-half, two times pay, or something else); and other factors.

More details on the tax provisions of the One, Big, Beautiful Bill are available on IRS.gov.