On November 21, 2025, the Internal Revenue Service (IRS) issued Notice 2025-69, providing guidance and clarification on the new federal income tax deductions for employee tips and certain overtime compensation taking effect in tax year 2025.
In July, President Trump signed the “One Big Beautiful Bill” into law, creating these deductions and new reporting obligations for employers. This formal guidance distills how the rules apply in 2025 and affirms that the IRS will provide transition relief for the 2025 tax year until updated forms and instructions are finalized.
No Tax on Tips – What Employers Need to Know
The Internal Revenue Code of 1986, as amended (“Code”) now provides an income tax deduction for qualified tips received by workers who “customarily and regularly received tips on or before December 31, 2024.” Workers may deduct an amount equal to the qualified tips received during the taxable year if the tips are either reported on the Form W-2 or Form 1099 or disclosed by the worker on Form 4137, subject to certain limitations.
The IRS confirmed that the 2025 Form W-2 will not be updated to reflect the new tip-related reporting requirements. Therefore, employers are not required to separately account for cash tips during the 2025 tax year.[1] Instead, employers should continue to report cash tips in Box 1, Box 5, and Box 7 of Form W-2, consistent with prior years.
No Tax on Overtime – Deduction for Qualified Overtime Compensation
The Code also established a new deduction for “qualified overtime compensation,” defined as compensation “in excess of the regular rate at which the individual is employed.” Individuals will be able to deduct this overtime pay when it appears on the written statement provided to the worker (Form W-2 or Form 1099).
Since 2025 is a transition year, employers are not required to separately account for or state the amount of such compensation on the 2025 Form W-2 or Form 1099. Instead, employers have the discretion to report qualified overtime compensation to employees in Box 14 of Form W-2 or on a separate statement.
Looking ahead to Tax Year 2026
The IRS has announced that it will release updated guidance and revised forms for tax year 2026 to fully incorporate the new deductions for tips and overtime wages. KMK’s Tax and Labor & Employment Teams will continue to closely monitor developments and provide updates as additional regulatory guidance becomes available. In the meantime, employers should begin reviewing their reporting practices to prepare for compliance in the 2025 tax year and ensure payroll providers are prepared for changes in 2026.
[1] Cash tips include tips received in the form of physical currency, or tips charged on a credit or debit card. Noncash tips, by contrast, are tips received in a medium other than cash, such as tickets or other goods.
KMK Law articles and blog posts are intended to bring attention to developments in the law and are not intended as legal advice for any particular client or any particular situation. The laws/regulations and interpretations thereof are evolving and subject to change. Although we will attempt to update articles/blog posts for material changes, the article/post may not reflect changes in laws/regulations or guidance issued after the date the article/post was published. Please consult with counsel of your choice regarding any specific questions you may have.
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