New Tax Laws
Dear Employee:
The recently enacted One Big Beautiful Bill Act (OBBBA) introduced two important tax benefits (tax years 2025 through 2028) for workers who earn tips and overtime:
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No Tax on Tips Deduction: You may deduct up to $25,000 of qualified tips from your federal taxable income if you work in an occupation that customarily and regularly receives tips. Only voluntary payments from customers, not mandatory service charges, are eligible for the deduction. There is also a phase out of the deduction after a certain modified adjusted gross income is met (refer to IRS Notice 2025-69).
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No Tax on Overtime Deduction: You may be eligible to deduct a portion of your qualified overtime pay (specifically, the premium “half time” portion) from your federal taxable income, up to a limit ($12,500 on qualified overtime pay for individuals or $25,000 for joint filers) from your federal taxable income. This applies only to the premium portion of overtime pay required under federal law (the “half” in “time-and-a-half”). There is also a phase out of the deduction after a certain modified adjusted gross income is met (refer to IRS Notice 2025-69).
You will find the amounts of any Tips and Overtime paid in Box 14 of your 2025 W2 form.
Please note that the amount listed for Overtime in Box 14 of your W2 is the TOTAL dollar amount of overtime paid. You will need to calculate your eligible deduction.
The IRS has published guidance on how individuals can determine if they are eligible under the FLSA and how to determine their eligible deduction amount. Please refer to IRS Notice 2025-69 for guidance.
For more information on the regulations of the OBBBA, which was signed into law on July 4, 2025, please refer to the IRS website. IRS issued Notice 2025-69 that offers guidance to individuals for claiming deductions for qualified overtime (also how to calculate the amount) and qualified tips for the tax year 2025.
We strongly recommend consulting with a tax professional for specific guidance on your individual circumstances and if you have any questions regarding this information.