On Friday,  the IRS issued Notice 2025-69 which substantially relaxed employee requirements for taking the new tip and overtime deductions only for 2025. 2026 will still require reporting on the newly designed W-2, but this year’s deduction may rely on other methods and calculations.

Tip Deduction
For employees that do not have the tip amount reported correctly or completely, they may use the amounts on Box 7 of the W-2 or Form 4137 if employees, or their own tip logs if non-employees. Remember the tips need to have been reported as income to get the deduction, so if using a tip log make sure that the tip income was reported. 

Although the occupation of an employee receiving tips may not appear on the Form W-2 furnished to the employee in 2025, the employee is still responsible for determining whether the tips received by the employee were received in an occupation that customarily and regularly received tips on or before December 31, 2024. The Notice also provides transition treatment for the specified service trade or business rule, treating 2025 tips as eligible if the occupation customarily received them before 12/31/24.

Employers are not required to separately account to the IRS for cash tips on the written W-2, 1099, or other statements furnished to individuals for 2025.

Overtime Deduction
Because of the confusion regarding overtime reporting and potential employer inability to report the amounts, an employee that has not had qualified tips reported to them may use any reasonable method to estimate the tips, with the most common method being to use 1/3 of the amount reported on check stubs or other employer forms as overtime pay if the employer has not provided the qualified overtime amount.

Employers are not required to separately account to the IRS for overtime on the written W-2 or other statements furnished to individuals for 2025. As we previously noted in last week’s special newsletter, employer reporting of qualified overtime is the best approach to avoid employee issues.

Example 1:
Bob’s last pay stub for 2025 shows “overtime premium” of $10,000 paid in 2025 (which is
Bob’s overtime premium paid at a rate of two times the individual’s regular rate). For purposes of determining the amount of qualified overtime compensation received in tax year 2025, Bob may include $5,000 ($10,000 divided by 2).

Example 2:
Charlie works in law enforcement and is paid $15,000 of total annual overtime pay on a “work period” basis of 14 days. For purposes of determining the amount of qualified overtime compensation received in tax year 2025, Charlie may include $5,000 ($15,000 divided by 3).