Changes in Tax Rules on Tips and Overtime

Beginning for tax year 2025, there is a new deduction whereby filers can deduct up to $25,000 of their tips for those taking standard deductions and for those who itemize, even if they are self-employed.  For non-employees, qualified tips are deductible only to the extent gross income from the sole proprietor’s business, including tips, exceed deductions from that business, other than the deduction for qualified tips.  The tip deduction ends after 2028.  There are a lot of details for the deduction, and only qualified tips are deductible.  Tips must be from an occupation that traditionally receives tips.  

There is also a new tax deduction for up to $12,500 of overtime pay ($25,000 for joint filers).  As on tips, these deductions are available to tax payers either who claim the standard deduction or who itemize.  Also, like the tip deduction, these deductions end after 2028.  

Employer reporting of tips on the Form W-2 and for qualified overtime pay is voluntary for 2025.  The IRS says it will issue transitional relief for employers who made good-faith efforts to comply with the reporting rules.

This article is part of our November 2025 Newsletter. 

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