2 IRS Notices Shed Light on Reporting Overtime and Tips

Thinking about adding tips and overtime compensation to box 14 of Form W-2 for TY 2025? Two recent IRS notices have provided insight.

The IRS issued its latest notice covering the One Big Beautiful Bill Act (OBBBA) on November 21, 2025.

In Notice 2025-69, the IRS offered guidance to individual taxpayers who plan to claim the new deductions for qualified tips and qualified overtime compensation on Form 1040 for tax year 2025.

As workers get ready to fill out the 1040 – and are likely to come to Payroll for help – the IRS guidance may clear up some of their confusion.

Payroll practitioners can not only refer employees to the notice to answer their questions, they can also glean information for themselves about how to handle year-end reporting on W-2s and 1099s. After all, the IRS previously announced that it won’t make changes to Form W-2 or Form 1099 for tax year 2025 and that reporting will be optional for this tax year.

Calculating Overtime

In Notice 2025-69, the IRS makes an important clarification about who’s eligible to take the deduction for overtime compensation. Of note, an employee who’s exempt from overtime under the federal Fair Labor Standards Act (FLSA) can’t claim the federal income tax deduction.

However, what if someone is exempt from overtime under the FLSA but is eligible for overtime under state law or is paid premium rates for certain work for other reasons?

That overtime isn’t qualified, the notice plainly states.

So, unless employers voluntarily include a separate accounting of qualified overtime compensation in box 14 of Form W-2 (or on a separate statement), employees will need to make a reasonable effort to determine whether they’re considered FLSA-eligible employees.

Heads up: That may involve asking their employers about their status under the FLSA, the notice indicates.

As for the amount of qualified overtime an individual can take as a federal income tax deduction, for tax year 2025, an employee can rely on the information employers voluntarily provide in box 14 of Form W-2 (or on a separate statement).

In the absence of that, the individual can turn to other documentation, such as pay statements or a payroll system that shows totals of amounts paid, including overtime, during 2025.

The employee would then need to determine if your company paid the required federal overtime amount (one-and-a-half times the regular rate of pay) and divide the amount by one-third. Or if, for example, your company paid two times the regular rate of pay, the employee would divide the amount by one-fourth.

Note: Individuals who had multiple employers during 2025 may, if necessary, use one method for one employer and another method for another employer, according to the notice.

Bear in mind, the OBBBA sets limits on how much can be deducted. The maximum overtime deduction is $12,500 for individuals and $25,000 for joint filers.

Calculating Tips

As with overtime, employees can rely on the amount of cash tips that an employer voluntarily reports in box 14 of Form W-2 (or on another statement).

Without that, an employee has other options for calculating the amount of qualified tips for tax year 2025. The IRS says employees can use the total amount of:

• Social Security tips reported in box 7 of the Form W-2, or
• Tips they reported to the employer on all Forms 4070, Employee’s Report of Tips to Employer.

Plus, employees can use any amount listed on line 4 of the 2025 Form 4137, Social Security and Medicare Tax on Unreported Tip Income, filed with the employee’s 2025 income tax return (and included as income on that return).

Reminder: Under the OBBBA, the maximum tips deduction allowed is $25,000.

IRS Penalty Relief

Earlier this year, in Notice 2025-62, the IRS said that it’d provide TY 2025 penalty relief to employers and other payors for two errors as they relate to the OBBBA.

The errors and their Internal Revenue Code (IRC) references are:

• Failure to file correct information returns (IRC Sec. 6721), and
• Failure to furnish correct payee statements (IRC Sec. 6722).

That penalty relief took the immediate pressure off in regards to:

• No tax on tips – the OBBBA requires a separate accounting of any amount reasonably designated as cash tips and the occupation of the individual receiving such tips, and
• No tax on overtime – the law says that employers must separately provide the total amount of qualified overtime compensation. 

Optional Info on W-2s and 1099s

In Notice 2025-62, the IRS said that, while businesses don’t have to relay any information to employees and independent contractors regarding tax year 2025 OBBBA tips and overtime, some may choose to do so.

The IRS suggested that could be done using:

• Box 14 of Form W-2
• Additional written statements provided to workers
• An online portal, or
• Other secure methods.