By Sam StevensonShareNewsweek is a Trust Project memberMillions of Americans who receive tips or overtime pay have been issued new guidance from the Internal Revenue Service (IRS) clarifying what tax deductions are available to them.
Why It Matters
This guidance stems from provisions enacted in the One Big Beautiful Bill Act. The IRS estimates that about 6 million workers report tipped wages annually, highlighting broad potential impacts on household finances and tax planning for both individuals and employers across the country.
...What To Know
On Friday, the IRS and Treasury Department released detailed instructions for workers claiming new deductions for tips and overtime pay for tax year 2025.
- Tips Deduction: Workers in occupations that customarily receive tips—such as restaurant servers, bartenders, and certain self-employed service providers—may be eligible to deduct up to $25,000 per year in qualified tips for tax years 2025 through 2028. The deduction phases out for taxpayers with modified adjusted gross income (AGI) above $150,000 (or $300,000 for joint filers).
- Overtime Deduction: Individuals may deduct the portion of their overtime pay required under the Fair Labor Standards Act (FLSA) that exceeds their regular rate (the "half" in "time-and-a-half"). The maximum annual deduction is $12,500 ($25,000 for joint filers), also subject to AGI phaseouts.
The IRS provided illustrative examples.
For instance, a server with $18,000 in reported tips on their Form W-2 (the tax document that employers must send to their employees and the IRS at the end of each year) may use that full amount for the deduction.
Meanwhile, a bartender reporting $24,000 in tips, both on W-2 and Form 4137 (used by employees who receive tips as part of their income but did not report all of those tips to their employer), could use these figures—depending on documentation—for their claim.
For overtime, an employee who earned $5,000 as the "overtime premium" or whose payroll statement lists $15,000 in total overtime compensation—with $5,000 qualifying as the FLSA( Fair Labor Standards Act)-required premium—may use the $5,000 premium amount for the deduction.
What People Are Saying
The IRS says: “The IRS is in the process of updating income tax forms and instructions for taxpayers to use this filing season that will assist them in claiming these deductions.
“Today’s guidance provides additional examples for workers who receive overtime. The IRS will continue to update taxpayers about tax benefits from the One, Big, Beautiful Bill on IRS.gov.”
What Happens Next
Employers and payors are not subject to penalties for failing to provide separate tip or overtime reporting for tax year 2025, provided regular reporting obligations are satisfied.
However, they are encouraged to help workers by providing the necessary documentation.
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