Under Notice 2025-62, the Internal Revenue Service provided guidance to employers whose employees receive tips or overtime as to the procedures to follow for documenting qualified tips and qualified overtime on 2025 tax returns.
That guidance basically asked employers to use their best efforts to provide that documentation; however, recognizing that the legislation creating those deductions was enacted halfway through 2025 and employers may not have the ability to identify qualifying tips and overtime under the new law, the IRS announced that no penalties would be imposed on employers that were unable to document qualified tips and overtime for 2025.
Now, in Notice 2025-69, the IRS has also provided guidance to taxpayers seeking to report their qualified tips and overtime on the 2025 tax return. Taxpayers are not provided with any specific waiver of penalties. However, they are given several options based on the information, or lack of information, provided by their employers. The law normally requires employees to report only the qualified tips and qualified overtime reported to the IRS by their employers. These notices provide an exception to this requirement for 2025 tax returns only.
Tips under Notice 2025-69
Employers are not required to separately account for cash tips on IRS forms or statements furnished to individuals for 2025. Notice 2025-69 states that an employee may treat the requirement that qualified tips be included on a statement furnished to the employee for 2025 as satisfied if the employee's cash tips are properly reported on the employee's W-2 without regard to whether there is a separate account for the total amount of cash tips. The employee may calculate the amount of qualified tips under one of the following options:
- Use the total amount of Social Security tips reported in Box 7 of Form W-2;
- Use the total amount of tips reported by the employee to the employer on Form 4070 ("Employee's Report of Tips to Employer"), or any similar substitute form; or,
- If an employer voluntarily chooses to report the amount of an employee's cash tips in Box 14 of Form W-2 (or a separate statement), the employee may use that amount to report qualified tips.
- An employee may also include any amount listed on Line 4 of 2025 Form 4137 filed with the employee's 2025 income tax return.
- Occupation codes. Whether or not the employer has provided an occupation code for the employee, the employee is still responsible for determining whether the tips were received in an occupation that customarily and regularly received tips on or before Dec. 31, 2024, as provided by the Secretary of the Treasury. As of this writing, the Treasury has identified 68 qualifying occupation codes.
- Specified service trades or businesses. In general, employees of specified service trades or businesses, such as accounting, law and other professions, are not considered eligible to receive qualified tips. However, for 2025, the IRS will treat an employee as having received tips in a trade or business that is not a SSTB if it is an occupation that is one of the occupation codes provided by the Secretary of the Treasury.
- Non-employees. Similarly for non-employees, if the non-employee's cash tips are included in the total amounts reported as other income on Form 1099-MISC, as non-employee compensation on Form 1099-NEC, or as payment card/third-party network transactions on Form 1099-K, then the non-employee may calculate qualified tips using earnings statements or other documentation to corroborate the calculation for 2025. The non-employee may also request additional information from the payor. The occupation code requirements and SSTB waiver for 2025 also apply to non-employees.
Notice 2025-69 also includes a few examples of calculating qualified tips.
Overtime under Notice 2025-69
Notice 2025-69 provides that payments in excess of the Fair Labor Standards Act-required premiums are not qualified overtime. Only the additional one-half of pay premium in excess of regular pay is considered qualified overtime. The employee should confirm that their employer is an FLSA employer.
For 2025, qualified overtime may be reported anywhere on Form W-2 or a separate statement. It also may be on Form 1099-NEC or 1099-MISC. For 2025, an employee may determine qualified overtime from any of the following:
- The employee was paid overtime compensation at a rate of 1½ times the regular rate for hours in excess of 40 hours per week and receives a statement separately accounting for overtime premiums;
- The employee was paid 1½ time over 40 hours; however, it was not separately stated. Employee may use one third of the total;
- If the employee was paid over 1½ time, use the appropriate fraction, e.g., if twice the regular rate, use one-fourth of the total;
- The adjustment under Nos. 2 or 3 above may be adjusted to correct an underestimation.
- Under any of the above methods, if no statement has been received, the individual may use a reasonable method using regular rate of pay and hours over 40 per week and any employer information provided.
- Public sector, hospital and residential care employees may use alternative overtime rules.
Several examples are also provided in the notice for calculating qualified overtime.
Summary
While the IRS is attempting to provide a great deal of flexibility in calculating qualified tips and qualified overtime for 2025, the various options may still be confusing for many taxpayers. The taxpayer must still have documentation of some form to support the deduction of tips and overtime. Taxpayers must also be able to establish that they fall into one of the accepted occupation codes. The taxpayer may also be on their own to make the calculation of qualifying tips and qualifying overtime without clear documentation from the employer or other payor.
