These two new deductions are real for tax year 2025 (filed in 2026), but they’re also compliance-driven. The IRS designed them so the deduction is tied to what’s reported (W-2/1099/other statements), which means the biggest filing-season failures will be payroll coding, documentation, and mismatched reporting—not math.
Quick reminder: this is federal. States may or may not follow it (California generally won’t automatically conform).
1) “No Tax on Tips” deduction (2025–2028): the rules that matter
Who qualifies (plain English)
For 2025–2028, employees and self-employed individuals can deduct qualified tips if:
the tips were earned in an occupation the IRS lists as one that customarily and regularly received tips on or before Dec 31, 2024, and
the tips are reported on a Form W-2, Form 1099, or other specified statement, or are reported by the individual on Form 4137.
What counts as “qualified tips”
The IRS fact sheet describes qualified tips as voluntary cash or charged tips received from customers or through tip sharing.
Dollar limits and phaseouts
Max deduction: $25,000/year
Phaseout: begins when modified AGI > $150,000 (or $300,000 joint)
Self-employed cap: your deduction can’t exceed your net income (before this deduction) from the business where you earned the tips.
Restrictions people will miss
Not eligible if you’re self-employed in a Specified Service Trade or Business (SSTB) under §199A; employees whose employer is an SSTB also aren’t eligible.
You must include your SSN on the return, and if married you must file jointly to claim it.
IRS “list of tipped occupations”
Treasury/IRS issued guidance and proposed regulations listing nearly 70 occupations and grouping them into categories (food/beverage, hospitality, personal services, transportation/delivery, etc.).
2) “No Tax on Overtime” deduction (2025–2028): what counts (and what doesn’t)
The deduction is only the “premium” portion
For 2025–2028, you can deduct qualified overtime compensation—specifically the pay that exceeds your regular rate, such as the “half” portion of “time-and-a-half” that is required by the Fair Labor Standards Act (FLSA).
Dollar limits and phaseouts
Max deduction: $12,500/year (or $25,000 joint)
Phaseout: begins when modified AGI > $150,000 (or $300,000 joint)
Reporting requirement (this is the key)
The overtime amount must be reported on a Form W-2, Form 1099, or other specified statement.
And same as tips: SSN required, and married taxpayers must file jointly.
3) The part employers need to take seriously: reporting is part of the design
The IRS is explicit: employers and other payors are required to file information returns (to IRS or SSA for W-2) and furnish statements to taxpayers showing:
for tips: certain cash tips received and the occupation of the tip recipient
for overtime: the total qualified overtime compensation paid during the year
Transition reality for tax year 2025
Treasury/IRS acknowledged that many employers don’t have the systems in place yet and that Forms W-2 and 1099 for tax year 2025 will not be updated for the new fields. So they issued penalty relief for tax year 2025 for these new reporting requirements (Notice 2025-62).
Important: penalty relief ≠ “ignore it.” IRS encourages employers to provide employees/payees separate accountings (e.g., portal, written statement, secure method), including potentially showing qualified overtime in Box 14 on the W-2.
4) Filing-season playbook (employees + businesses)
If you’re a worker receiving tips/overtime
Save paystubs / year-end statements that break out:
tip income (cash + charged tips, plus tip pooling amounts), and
overtime premium portion (not just total OT pay)
Confirm your occupation is on the IRS tipped list if you plan to claim the tips deduction.
If you’re near $150k / $300k MAGI, run the phaseout math before you assume the deduction will survive.
If you’re an employer/payor
Validate your payroll system can:
tag tipped occupation codes (where applicable), and
calculate/store the qualified overtime premium portion (FLSA “half” component)
Stand up a year-end employee statement process for 2025 (because the W-2 may not carry the dedicated fields).
Treat 2025 as the “transition year” to get clean for 2026+ reporting even if penalties are relaxed in 2025.