Tip and overtime deductions after final §224 tip regulations

Recently, the Treasury and the IRS finalized the qualified tip regulations under §224.  

Published April 13, 2026, and effective June 12, 2026, the final rule: 

• Confirms a fixed list of tip-eligible occupations 
• Includes floral designers, visual artists and gas pump attendants 
• Clarifies that a payment qualifies as a tip only if the customer can reduce it to zero 
• Leaves the specified service trade or business (SSTB) exclusion for future guidance 

The overtime discussion below still holds, but the tip discussion should now be read alongside these final regulations.  The final regulations also clarify that only voluntary tips qualify, meaning the customer must be able to reduce the payment to zero, while mandatory service charges and automatic gratuities do not qualify as tips.

What tax pros should still watch for on 2025 returns

Few tax law changes in recent years have generated as much curiosity and confusion as the new deductions for qualified tips and qualified overtime compensation. Enacted as part of the One Big Beautiful Bill Act (OBBBA), these provisions promise meaningful relief for many workers. At the same time, they present practical challenges for taxpayers, employers and the professionals who advise them.

Since the law’s passage, the IRS and Treasury have continued filling in the details. Notice 2025-69 and the final qualified tip regulations under §224 now provide a clearer framework for how these deductions apply for the 2025 tax year. For tax pros, that guidance turns a broad policy idea into something that can actually be applied on a return.

Why these deductions matter in practice

The OBBBA added two new deductions for tax years beginning in 2025.

• One allows eligible individuals to deduct qualified tips, capped at $25,000 per year, even for joint filers. 
• The other allows a deduction for the premium portion of qualified overtime compensation, capped at $12,500 per return ($25,000 for joint filers). 

Both deductions begin phasing out for taxpayers with modified adjusted gross income (MAGI) over $150,000 ($300,000 for joint filers).

On paper, the rules sound straightforward. In reality, many taxpayers will not see these amounts clearly labeled on their tax forms, at least not yet. For 2025, Forms W-2 and 1099 generally will not separately report qualified tips or qualified overtime, and taxpayers may need to rely on transition methods described in Notice 2025-69. That gap is why the notice remains essential reading.

What the IRS clarified 

A central issue addressed in the notice is substantiation. With no dedicated boxes on 2025 tax forms, how can taxpayers prove their deductions? The IRS responded with practical solutions.

For the qualified tip deduction

Taxpayers can use existing documentation to determine their deductible amount. For 2025, employees may rely on:

• The total amount of Social Security tips reported in Box 7 of Form W-2
• The total tips reported to their employer on Form 4070, Employee’s Report of Tips to Employer, (or any similar substitute form used to monthly report tips to the employer)
• Any unreported tips included on Form 4137, Social Security and Medicare Tax on Unreported Tip Income
• Any amount an employer voluntarily reports in Box 14 of Form W-2

Non-employees may use reasonable records, including point-of-sale reports, daily tip logs or earnings statements from payors to substantiate their qualified tip income.

For the qualified overtime deduction

The deduction is limited to the premium portion of overtime required under the Fair Labor Standards Act (FLSA), generally, the extra “half” in “time-and-a-half.” Since employers are not required to break this out on 2025 pay stubs, Notice 2025-69 provides several reasonable calculation methods. If an employer does not separately report the premium, an FLSA-eligible employee can use their pay stubs and apply these methods:

• If a pay statement shows the total overtime earnings (the full 1.5x pay), the deductible premium is one-third of that total amount.
• If an employer pays double-time (2.0x) and the pay statement shows the total overtime pay, the deductible FLSA premium is one-fourth of that amount.

The key is that only the federally mandated premium qualifies, not any excess paid voluntarily by an employer or required only by state law. 

Transition relief and compliance timing

Another notable feature of Notice 2025-69 is transition relief, particularly for the tip deduction. The law states that tips from a specified service trade or business (SSTB) do not qualify. However, the final §224 regulations reserve that issue for future guidance. As a result, the transition relief described in Notice 2025-69 continues until further SSTB-specific guidance is issued.

The IRS is updating income tax forms and instructions to better support these deductions in future filing seasons. Separate reporting of qualified tips and qualified overtime is scheduled to begin for the 2026 tax year, which means advisers should begin preparing clients now for changes ahead. 

What tax pros should be telling clients

This is not a “wait and see” moment. Tax professionals should be helping clients understand recordkeeping expectations, income limits and filing requirements, including the joint return requirement for married taxpayers to claim either deduction. Clear communication can prevent unrealistic expectations and reduce the risk of errors when these deductions are claimed.

For those looking to go deeper, Applying the Latest Guidance on Overtime and Tip Deductions, NATP's on-demand webinar, will walk through the mechanics of the law and the latest IRS guidance, with a focus on real-world application. Presented by NATP’s Tom O’Saben, EA, Ed. M., and Alice Jacobsohn of Payroll.org, the session is designed to help tax pros advise clients with confidence as these provisions take hold.