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The New Deductions Taking Effect This Tax Season

Service industry workers are getting their first look at two major tax breaks created by the One Big Beautiful Bill Act. The “no tax on tips” and “no tax on overtime” provisions went into effect January 1, 2025, and millions of workers will claim these deductions when filing their 2025 returns this spring.

According to the IRS, approximately 6 million workers report tipped wages annually. The new tips deduction allows eligible workers to deduct up to $25,000 of qualified tips from their federal taxable income. The overtime deduction permits workers to deduct up to $12,500 of qualifying overtime pay, or $25,000 for married couples filing jointly.

Both deductions phase out for higher earners. Single filers with modified adjusted gross income above $150,000 see reduced benefits. Joint filers hit the phase-out threshold at $300,000 MAGI. The deductions disappear entirely at $400,000 for single filers claiming tips and $275,000 for those claiming overtime.

Tax attorneys helping clients navigate these new provisions should understand the specific requirements. As outlined in our pillar article on Tax Season 2025: How the Big Beautiful Bill Act is Changing the Filing Experience, these deductions require careful documentation and proper calculation methods.

IRS Guidance Clarifies Claiming Methods for 2025

The Treasury Department and IRS released Notice 2025-69 in November, providing detailed guidance for workers claiming these deductions. The notice addresses a practical challenge: 2025 W-2 forms were not updated to separately report tips and overtime amounts.

For tipped workers, the IRS outlines several acceptable methods to determine deductible amounts. Employees can use the social security tips shown in Box 7 of their W-2, the total tips reported to employers on Forms 4070 during the year, or amounts employers voluntarily report in Box 14.

Overtime calculations require more attention to detail. Only the premium portion of overtime pay qualifies for the deduction. For standard time-and-a-half pay, workers can use one-third of their total overtime compensation. If an employer paid double-time, the qualifying amount is one-fourth of total overtime.

The IRS guidance provides transition relief for the first year. Workers in occupations that customarily received tips before December 31, 2024 can claim the deduction even if their employer operates a specified service trade or business.

Schedule 1-A: The New Form for 2025 Deductions

The IRS created Schedule 1-A specifically for these new deductions. The form consolidates four OBBBA provisions: tips, overtime, car loan interest, and the senior deduction. Each has its own section on the form.

For the tips deduction, workers must have a Social Security number valid for employment and cannot use the Married Filing Separately status. The overtime deduction requires that workers be covered by and not exempt from the Fair Labor Standards Act.

Self-employed individuals can also claim the tips deduction if they work in occupations that traditionally receive tips. Gig economy workers receiving tips through third-party settlement organizations should maintain logs documenting tip amounts, as Forms 1099-K do not separately identify tips.

Tax professionals should note that employers are not required to separately report these amounts for 2025. According to RSM analysis, employers should anticipate questions from employees seeking information about their FLSA status and overtime amounts paid during 2025.

Business owners considering how OBBBA affects their operations should also review the permanent QBI deduction changes detailed in The Permanent QBI Deduction: What Small Business Owners Should Know About OBBBA.

Documentation Requirements for Workers

Workers claiming either deduction should maintain thorough records. Pay stubs, earnings statements, and tip logs serve as acceptable documentation when W-2s do not separately report the amounts.

The IRS recommends keeping:

• All 2025 pay stubs showing regular and overtime hours
• Forms 4070 or daily tip records
• Any statements from employers regarding FLSA status
• Documentation of tip amounts from point-of-sale systems

These deductions are temporary. They apply only to tax years 2025 through 2028 unless Congress extends them. Workers should maximize benefits during this window while maintaining proper documentation.

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About the Author

Jim Toppe is the founder of Toppe Consulting, a digital marketing agency specializing in law firms. He holds a Master of Science in Management from Clemson University and teaches Business Law and Marketing at Greenville Technical College. Jim also serves as publisher and editor for South Carolina Manufacturing, a digital magazine. His unique background combines legal knowledge with digital marketing expertise to help attorneys grow their practices through compliant, results-driven strategies.

Works Cited

“Treasury, IRS Provide Guidance for Individuals Who Received Tips or Overtime During Tax Year 2025.” Internal Revenue Service, 21 Nov. 2025, www.irs.gov/newsroom/treasury-irs-provide-guidance-for-individuals-who-received-tips-or-overtime-during-tax-year-2025.

“IRS Provides Guidance for Individuals to Claim ‘No Tax on Tips and Overtime’ Deductions for 2025.” RSM US LLP, Nov. 2025, rsmus.com/insights/tax-alerts/2025/irs-guidance-claim-overtime-deduction.html.

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• Tax Season 2025: How the Big Beautiful Bill Act is Changing the Filing Experience
• The Permanent QBI Deduction: What Small Business Owners Should Know About OBBBA