IRS No Tax on Tips 2025 Guide: Overtime Pay Deductions Explained

The IRS just released major new tax guidance for American workers. This guidance details how to claim new deductions on tips and overtime pay. These changes are for the 2025 tax year.

The rules stem from the One Big Beautiful Bill Act. The Treasury Department and IRS issued the notice to clarify the process. Millions of workers could see lower tax bills next year.

How the Qualified Tip Deduction Works

Workers can now deduct up to $25,000 in qualified tips. This applies to cash and card tips given voluntarily. Service charges added to a bill do not count.

The deduction is available for workers in traditionally tipped roles. According to Reuters, this includes restaurant and hospitality staff. The IRS will accept tips reported on a W-2 or from personal logs.

There is an income limit for this benefit. The deduction phases out for single filers earning over $150,000. For married couples filing jointly, the phase-out starts at $300,000.

Understanding the New Overtime Pay Rules

A separate deduction exists for qualified overtime compensation. The maximum deduction is $12,500 for individuals. Joint filers can deduct up to $25,000.

The IRS defines qualified overtime as the premium half-time pay. Only overtime mandated by federal law qualifies. Voluntary overtime paid at a higher rate does not count for this break.

This deduction is available to all eligible workers. It does not matter if you take the standard deduction or itemize. This makes the benefit accessible to a wide range of employees.

What These Tax Changes Mean for You

The IRS is providing transition relief for the 2025 tax year. Employers will not be penalized for not separately reporting these amounts. Workers can use reasonable methods to calculate their deductions.

A new form, Schedule 1-A, is being created for these deductions. The IRS is currently finalizing the instructions. Taxpayers will use this form when filing their 2025 returns.

These changes represent a significant shift in tax policy for workers. They aim to provide direct financial relief to service industry and hourly employees. The full impact will be clear during the next tax season.

The new IRS guidance provides a clear path for workers to reduce their taxable income. Understanding the “No Tax on Tips” and overtime rules is crucial for maximizing your 2025 refund. These deductions offer substantial savings for eligible taxpayers.

Info at your fingertips

Who qualifies for the new tip deduction?

Workers in traditionally tipped occupations like food service and hospitality qualify. The tips must be voluntary from customers, not automatic service charges. Self-employed individuals can also qualify using their tip records.

How much overtime pay can I deduct?

Individual taxpayers can deduct up to $12,500 in qualified overtime pay. Married couples filing a joint return can deduct up to $25,000. Only the federally mandated overtime premium qualifies for the deduction.

What if my employer doesn’t report my tips separately?

The IRS is offering transition relief for the 2025 tax year. You can use other reasonable methods to document your tips. This includes your own records or the amount in Box 7 of your W-2.

Do I need a new form to claim these deductions?

Yes, the IRS is introducing a new Schedule 1-A for the 2025 tax year. This form will be for “Additional Deductions.” It will include sections for both the tip and overtime deductions.

Are these tax deductions permanent?

The deductions are currently law for the 2025 tax year. Future tax legislation would be needed to extend them beyond that. Always check for the latest IRS updates each tax season.