IRS Releases More Guidance on Tips and Overtime

On Nov. 21, the IRS released Notice 2025-69, which provides guidance for individuals calculating and claiming the deductions for qualified tips and qualified overtime compensation in 2025 enacted by the OBBBA. While the guidance is focused on individuals claiming the deduction, it could be helpful to employers and other payers as they consider how to comply with reporting obligations.

Background

For 2025 through 2028, the OBBBA adds new deductions for qualified tips under Section 224 and qualified overtime compensation under Section 225. The deductions are available if the amount of tips or overtime compensation is separately reported to the recipient on the applicable Form 1099 or Form W-2, “Wage and Tax Statement,” or in the case of qualified tips, on Form 4137, “Social Security and Medicare Tax on Unreported Tip Income.” Statutory rules require employers and other payers to report the total amount of cash tips paid, the occupation of the tip recipient, and qualified overtime compensation paid on the applicable Form 1099 or Form W-2.

The IRS provided transition relief for employers and payers, effectively eliminating their reporting requirements for 2025, as long as the total amount of qualified tips and overtime compensation paid is included in the total amount reported on the applicable form. As a result, individuals will not be receiving forms that separately state cash tips and qualified overtime compensation from employers and other payers.

Without a Form 1099 or W-2 separately reporting cash tips or qualified overtime compensation, individuals needed guidance from the IRS on how to determine the amount eligible for the deductions. Accordingly, Notice 2025-69 provides guidance to individuals on how to determine the 2025 deductions. The notice also confirms that for 2025, individuals can claim the deductions if otherwise eligible even if the amounts are not separately stated on the applicable Form 1099 or W-2 they receive.

The guidance in Notice 2025-69 is critical for individuals because 2025 Forms 1099 and W-2 are not going to be updated to allow employers and other payers to separately state qualified tips and overtime, and, for 2025, employers and payers generally will not be penalized for not providing these amounts to payees.

Determining the qualified tips deduction

Employees can use one of the following to determine the total amount of qualified tips:

• Social Security tips reported in box 7 of Form W-2
• Form 4070, “Employee’s Report of Tips to Employer,” or any similar substitute form used to report monthly tips to the employer
• Tips voluntarily reported by an employer in box 14 of Form W-2 or on a separate statement

In addition, employees also may include any amounts listed on line 4 of Form 4137.

Nonemployees, such as independent contractors, who receive tips can rely on documentation such as earnings statements, receipts, point-of-sale system reports, daily tip logs, third-party settlement organization records, or other documentary evidence to determine qualified tips.

Transition relief for determining SSTB status

Notice 2025-69 also provides transition relief regarding the exclusion of tips received in the course of a trade or business that is a specified service trade or business (SSTB) from the definition of qualified tips. The notice acknowledges that additional guidance is needed to help determine whether a trade or business is an SSTB. Accordingly, until Jan. 1 of the first calendar year following the issuance of final regulations, if an occupation appears on the IRS list of occupations that receive tips, employees and nonemployees can treat their occupation as eligible for the qualified tip deduction, even if the SSTB status is uncertain.

Crowe observation

Because the earliest that final regulations providing guidance on SSTBs can be published is 2026, the SSTB exclusion will not apply until at least 2027.

Determining qualified overtime compensation

Notice 2025-69 confirms that qualified overtime compensation is limited to overtime compensation in excess of the individual’s regular rate that is required under the Fair Labor Standards Act of 1938 (FLSA). Under the FLSA, required overtime is generally the 0.5 premium of 1.5 times the individual’s regular rate of pay for hours worked in excess of 40 hours in a workweek. Amounts paid due to state overtime laws, under a collective bargaining agreement, or any other circumstances not required by the FLSA, and amounts paid in excess of the FLSA-required premium do not qualify for the deduction.

Individuals who are not furnished with a separate accounting of qualified overtime compensation by their employer in box 14 of Form W-2 (or on a separate statement) must make a reasonable effort to determine whether they are considered FLSA-eligible employees. The employee can base the determination of qualified overtime compensation on documentation such as earnings or pay statements, invoices, or similar statements that support the determination, using a method described under the notice.

Looking ahead

While Notice 2025-69 provides welcome transition relief and guidance to individuals, the notice suggests that individuals ask employers and other payers about the status of payments if they have questions. Therefore, payers should be prepared for questions from payees. In particular, employers should evaluate whether its workforce includes employees engaged in an occupation on the list of occupations that receives tips or employees that might receive FLSA‑required overtime.