Claiming tips and overtime deductions on 2025 returns

Welcome to Spidel's Federal Tax Minute. I'm your host, Catherine Sedan. This week, we're covering transition relief and guidance for claiming tips and overtime deductions on 2025 tax returns. If you need additional details on this issue, register for Spidel's upcoming one-hour webinar from payroll to the tax return, implementing OBBBA tip and overtime income deductions on February 11. You can get details and sign up at spidel.com under webinars. The IRS issued notice 2025-69 to provide guidance and transition relief for the 2025 tax year for individuals to aid in the calculation of the new OBBBA deductions for qualified tips and overtime. This transition relief is necessary because the IRS did not update the 2025 Forms W2 or 1099 to account for these new deductions. For employees claiming the deduction for qualified tips under IRC Section 224, qualified tips can be calculated by using the total amount of social security tips reported on their Form W2 box 7. Tips reported by the employee to the employer on all Forms 4070, Employees Report of Tips to Employer, or any similar Substitute Form. Or cash tips reported on Form W2 box 14 or on a separate statement if the employer voluntarily reports this information. Additionally, an employee can include any amount listed on Line 4 of Form 4137, Social Security and Medicare Attacks on Unreported Tip Income, filed with the employee's 2025 income tax return. During the 2025 transition year, these amounts can be deducted on the 2025 return, even if they may include mandatory tips that would otherwise not be included in qualified tips. Taxpayers can only claim the deduction for qualified tips if the tips were received in an occupation that customarily and regularly received tips on or before December 31, 2024. 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 as long as the tips were included in the total amount reported on the 1099s, even though it wasn't separately stated. The qualified tips deduction is only allowed if the tips are received in a non-specified service trade or business. Because additional guidance is needed to help make this determination, the IRS has also created a transition period regarding the determination of whether qualified tips were received by a specified service trader business. The IRS will treat anyone, employees, and self-employed taxpayers who receives tips while performing work in an occupation that customarily receives tips as if the tips were received in a non-specified service trade or business. Regarding overtime for the 2025 tax year only, if an employer does not provide an accounting of qualified overtime to the employee, the employee can use any reasonable method to calculate their qualified overtime. Reasonable methods of accounting for overtime have to be based on documentation like earnings or pay statements, invoices, or similar statements. Only overtime paid to employees based on the Federal Fair Labor Standards Act is eligible for the overtime deduction. If the employer provides the employee with the qualified overtime paid, either in box 14 of the employees W2 or in a separate statement, then the employer's figure should be used and not the alternate method for calculating qualified overtime. We covered this topic in greater detail in the January 2026 issue of SpiteL's Federal Tax Letter, including examples and requirements that start in 2026. For more information on a subscription to this monthly newsletter, go to SpiteL.com and click Publications. That's all for this week. Join us next time for another episode of SpiteL's Federal Tax Minute.