The One Big Beautiful Bill Act (OBBBA) has introduced a significant change in tax deductions for employees, allowing them to claim an above-the-line tax deduction on qualified overtime pay and qualified tips for tax years 2025-2028. According to the National Law Review, this provision aims to benefit employees who receive overtime pay and tips as part of their compensation (natlawreview. com → article → irs-guidance-claiming-new-tax-deduction-tips-and-overtime-pay). To facilitate the claiming of these deductions, the Internal Revenue Service (IRS) released IRS Notice 2025-69 on November 21, 2025. This notice provides guidance on how individual taxpayers can calculate and claim the deductions for the tax year 2025, even if their employer does not provide separate documentation identifying which portions of overtime or tip income may qualify for the deduction.
The IRS Notice 2025-69 explains that taxpayers can use reasonable methods to estimate the qualified overtime pay and qualified tips, making it easier for them to claim the deductions (natlawreview. com → article → irs-guidance-claiming-new-tax-deduction-tips-and-overtime-pay). While the IRS has announced that it will not enforce separate reporting obligations for the 2025 tax year under ← →
The tax treatment of tips has long been a complex issue, with many employees relying on these supplemental wages to make ends meet. In the United States, tips are considered taxable income and must be reported by employees to the Internal Revenue Service (IRS). Employers are also required to report tip income and pay employment taxes on it.
However, the tax laws surrounding tips can be nuanced, and many employees may be unaware of their obligations when it comes to reporting tip income.
According to the IRS, employees are required to report all tips received, including cash tips, tips received through credit card charges, and tips received from other sources (www. irs. gov → pub → irs-pdf → p525. pdf). The Fair Labor Standards Act (FLSA) also plays a role in the tax treatment of tips, as it requires employers to ensure that employees receive a minimum wage for all hours worked.
In some cases, employers may use tip income to satisfy their minimum wage obligations, which can impact the amount of taxes owed by employees.
The IRS provides guidance on the tax treatment of tips, including information on how to report tip income and how to calculate taxes owed. For example, employees who receive tips may be able to take advantage of certain tax deductions, such as the deduction for business expenses related to their ← →
Other references and insights: Check hereFor tax years 2025 -2028, the One Big Beautiful Bill Act (OBBBA) allows employees to take an above-the-line tax deduction on qualified overtime pay ...●●● ●●●
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