Full notice (PDF): Guidance for Individual Taxpayers who received Qualified Tips or Qualified Overtime Compensation in 2025
Overview
⚠️Note: This information is for informational purposes only and does not constitute formal tax, legal, or compliance advice. Always consult with qualified tax advisors, legal counsel, and your organization’s internal teams for guidance specific to your situation. Additional regulations may apply. For the most accurate and up-to-date information, refer to official government resources and regulatory agencies.
IRS Notice 2025-69 provides transitional guidance for the new above-the-line deductions available starting in tax year 2025:
- Qualified Tips Deduction – up to $25,000
- Qualified Overtime Compensation Deduction – up to $12,500 (single) or $25,000 (joint)
These deductions are for individuals; however, employers play an important role in documenting tip and overtime amounts so employees can substantiate their claims.
For 2025 only, the IRS grants administrative relief to employers. Although employers are not required to separately report qualified tips or qualified overtime compensation, the IRS highly encourages them to do so. Employers may voluntarily provide this information – and the IRS outlines specific acceptable methods.
The Biggest Employer Takeaway
W-2 is the preferred place to provide tip and overtime information in 2025.
Although Notice 2025-69 gives employers transition relief and does not require separate reporting of qualified tips or qualified overtime for 2025 W-2s, employers may voluntarily provide this information.
The IRS clearly states employers are allowed to furnish tip and overtime information in:
- Box 14 of form W-2
This is the recommended and cleanest options for employees and tax preparers. It ensures workers have the documentation they need to claim the new deductions.
- A separate written statement
Employers may also provide a year-end summary letter or digital statement with tip and overtime amounts.
Even though it’s voluntary for 2025, providing Box 14 information helps employees claim valuable tax deductions and prepares payroll systems for 2026, when reporting boxing will be added.
Employer Options for Providing Tip and Overtime Information
Notice 2025-69 gives employers four primary methods to furnish tips and overtime data for 2025. Providing this information is strongly beneficial for employees and improves payroll readiness for 2026, when specific reporting boxes will be added. The methods include:
- Report information in Box 14 of Form W-2
Employers may include:
- Cash tips
- Qualified overtime compensation
- Employee’s occupation (for verifying eligibility for the tip deduction)
Box 14 is the preferred and cleanest method for both payroll tax departments and tax preparers.
- Providing a Separate Written Statement
Employers may furnish a:
- Year-end earnings statement.
- Printed letter.
- Digital payroll summary
- PDF provided through a payroll portal
- POS system tip totals
- Employer maintained electronic or manual tip logs
The statement may include:
- Total cash tips.
- Total qualified overtime compensation
- Occupation information
- Any additional details employees need for substantiating deductions
About Compensatory Time
Notice 2025-69 also explains how compensatory time (“comp time”) fits into the new deduction:
- Comp time paid instead of cash overtime can count toward the qualified overtime deduction.
- Employees may use a reasonable method to calculate the deductible portion, based on the value of the comp time they received.
Temporary Waiver for “Specified Service Trades or Businesses” (SSTBs)
Normally, specified service trades or businesses (SSTBs) are excluded from the qualified tips deduction. However, for 2025 only, Notice 2025-69 provides relief.
If the occupation has customarily and regularly received tips before December 31, 2024, the employee is eligible, even if working in an SSTB. This broadens eligibility significantly for the first year of implementation.
What Employers Should Do Now
Even though reporting is optional for 2025, the IRS’s guidance strongly suggests that employers:
- Provide tip and overtime information in Box 14 of the W-2, OR
- Furnish a separate year-end statement with the relevant details.
This helps employees claim deductions of up to $25,000 (tips) $12,500-$25,000 (overtime), and prepares payroll for mandatory separate reporting beginning 2026.
