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Giving Home > Professional Advisor Resources > Washington News > Additional IRS Guidance for "No Tax on Tips" and Overtime Deductions

Additional IRS Guidance for "No Tax on Tips" and Overtime Deductions

Published November 21, 2025

On November 21, the Internal Revenue Service (IRS) and the Department of Treasury published additional guidance to assist taxpayers planning to claim a deduction for qualified tips or qualified overtime compensation for tax year 2025. In Notice 2025-69, illustrative examples are provided to assist taxpayers with claiming the above-the-line deductions.

The One Big Beautiful Bill Act’s (OBBBA) “No Tax on Tips” deduction is allowed for up to $25,000 in tips in years 2025 through 2028. The deduction is phased out for single individuals with income over $150,000 and joint filers who earn over $300,000. A taxpayer will lose $100 of the exclusion for each $1,000 over the excess amount.

OBBBA’s qualified overtime exclusion is allowed for up to $12,500 ($25,000 for joint filers), in years 2025 through 2028. The overtime exclusion applies to taxpayers with modified adjusted gross income of up to $150,000 ($300,000 for a joint return). There are phaseouts on the deduction above those levels. The overtime pay must be in excess of the normal full-time pay rate. If an employee earns $18 per hour and is paid $27 per hour for overtime, only $9 per hour for overtime pay is deductible.

The IRS is developing updated forms and instructions to assist with these new laws. There are approximately 6 million taxpayers who report tipped wages. The guidance focuses on how individual taxpayers can determine the eligible amount for qualified tips and eligible overtime compensation.

The “No Tax on Tips” guidance included the following:

  • Employees: Use the total Social Security tips reported in Box 7 of their W-2 along with tips reported on Form 4070, and unreported tips from Form 4137.
  • Non-employees: May use tips reported on 1099-NEC, 1099-MISC or documented logs.
  • Transitional Relief for Specified Service Trade or Business (SSTB): Employees who customarily received tips in the course of employment in specified trades or businesses may rely on transitional relief. Until January 1 of the first calendar year following the issuance of final regulations, these taxpayers may treat their occupation as not an SSTB if it meets the occupation test.

For qualified overtime compensation, an inquiry into whether the employee is covered by the Fair Labor Standards Act of 1938 (FLSA) and is nonexempt must first be undertaken since certain individuals are exempt from overtime compensation requirements. If the taxpayer is not covered by FLSA, the overtime compensation is not qualified and cannot be deducted.

If the taxpayer does not receive a separate statement in 2025 showing overtime compensation, there are four options to determine the deductible amount:

  • If overtime was paid at 1.5 times the regular rate and the premium is separately stated, use that amount.
  • If overtime was paid at 1.5 times the regular rate, but the premium is not separately stated, an approximate fraction of one-third the aggregate dollar amount may be used.
  • If overtime is paid at higher rate, for example double the individual’s regular rate, then the fraction would be one-half. The taxpayer will have to adjust the fraction according to how overtime is paid.
  • If an individual is paid in excess of 1.5 times the regular rate, an adjusted appropriate fraction should be used based on a reasonable method from the information requested from and supplied by the employer.

IRS Backlog Concerns

On November 12, a stopgap spending bill cleared Congress and was signed into law. The bill continues government operations until January 30 and ends a 43-day federal government shutdown.

During the longest government shutdown in history, many of the Internal Revenue Service (IRS) essential business operations were slowed or halted. The IRS was also interrupted in preparing for the 2026 filing season and implementation of the many tax changes passed on July 4, 2025.  

On November 19, the IRS announced it has resumed normal business operations and is working to minimize delays in processing and response times. Because the extended filing deadline for tax returns on October 15 occurred during the shutdown, the processing of returns and refunds may be impacted.

At the recent American Institute of CPAs (AICPA) National Tax Conference, former IRS acting commissioner, Douglas O’Donnell, noted concern about the new tax provisions creating an increased need for help, updated forms and implementation from the IRS.

The Treasury Inspector General for Tax Administration (TIGTA) issued its semiannual report to Congress this week, indicating that the IRS workforce has been reduced by approximately 25%. An earlier TIGTa report noted a 17% reduction in the workforce for the field assistance area, which directly impacts taxpayers.

Tax season typically opens at the end of January. The IRS has not indicated if the tax filing season will be delayed due to the shutdown.

Editor’s Note: It is expected that the IRS will start to issue tax refunds in mid to late February. It may be weeks or even months before the IRS processes the backlog of filings and correspondence.

IRS Taxpayer Advocate Office Reopens

On November 19, the Taxpayer Advocate Service (TAS) announced that all offices were reopened. The press release noted that response times may be extended as the TAS prioritizes the most critical emergencies. 

TAS is an independent organization within the IRS that operates to help taxpayers resolve problems. TAS also recommends changes to IRS processes and procedures to improve future outcomes for taxpayers.

If you have an open case, you can visit your local TAS field office, though in-person response times may vary. For those seeking help over the phone, TAS encourages taxpayers to leave a voicemail if their call to TAS is not immediately answered.

TAS also offers some self-help resources that may be useful to taxpayers. Frequently asked questions may be addressed by visiting its website: taxpayeradvocate.irs.gov/faqs/.

If a taxpayer received a notice or a letter from the IRS, additional information may be obtained related to the correspondence and next steps can be found online at the following site: taxpayeradvocate.irs.gov/notices-from-the-irs/. The online resources may provide insights and additional information.

Additional resources for self-serve help topics can be found online at taxpayeradvocate.irs.gov/get-help/. The IRS website also hosts helpful tax news and has electronic versions of tax filing forms.

Applicable Federal Rate of 4.6% for December: Rev. Rul. 2025-24; 2025-50 IRB 1 (17 November 2025)

The IRS has announced the Applicable Federal Rate (AFR) for December of 2025. The AFR under Sec. 7520 for the month of December is 4.6%. The rates for November of 4.6% and October of 4.6% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2025, pooled income funds in existence less than three tax years must use a 4.0% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”