Today, the IRS issued guidance and transitional relief for individual taxpayers to calculate the new OBBBA deductions for qualified tips and overtime. (Notice 2025-69) This guidance follows the guidance previously issued via IR-2025-82 and Notice 2025-62, which provided similar information for employers and issuers of Forms 1099. All of this special guidance and transition relief is required for taxpayers to be able to claim these deductions, because the IRS did not update 2025 Forms W-2 or 1099 to account for these new OBBBA deductions.
For employees claiming the deduction for qualified tips under IRC §224, qualified tips can be calculated by using the total amount of:
- Social Security tips reported on their Form W-2, box 7;
- Tips reported by the employee to the employer on all Forms 4070, Employee’s Report of Tips to Employer (or any similar substitute form); or
- Cash tips reported on Form W-2, box 14 (or on a separate statement) if the employer voluntarily reports this information.
In addition to the three methods above, an employee can also include any amount listed on line 4 of Form 4137, Social Security and Medicare Tax On Unreported Tip Income, filed with the employee’s 2025 income tax return.
Self-employed taxpayers can calculate their qualified tips through either:
- A separate statement provided by a 1099 issuer (because 2025 Forms 1099 were not modified to separately report qualified tips); or
- Using earning statements or other documentation such as receipts, point-of-sale system reports, daily tip logs, third-party settlement organization records, or other documentary evidence, but only for those amounts that are actually included on a 1099.
The IRS has also created a transition period regarding the determination of whether qualified tips were received by a specified service trade or business (SSTB). At least for the 2025 tax year, the IRS will treat all employees who receive tips as if the tips were received in a non-SSTB. This will provide much welcome relief, especially for performing artists who typically received tips but may be ineligible for the tip deduction because of the SSTB determination. Forthcoming regulations should provide clearer guidance for performing artists and other taxpayers who are unsure whether they are an SSTB.
Notice 2025-69 similarly provides simple, alternate methods of calculating qualified overtime for those taxpayers whose employers do not provide a separate statement with Fair Labor Standards Act (FLSA) qualified overtime for 2025. The methods are too numerous to list, but the IRS has provided examples in the notice to help guide taxpayers and tax professionals through each of the different calculation methods. There is nothing in the guidance addressing overtime for the self-employed, but there is guidance on special FLSA overtime rules for certain workers such as firefighters, public safety officers, certain other government employees, and hospital and certain residential facility workers.
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