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The IRS recently released guidance (Notice 2025-69 (PDF - 224 KB)) for individual taxpayers who may be eligible for the new federal income tax deductions created by the One Big Beautiful Bill Act (OBBBA) for qualified tips and overtime compensation received in 2025.
The notice also provides transition relief for both employees and employers that extends beyond 2025 regarding the requirement that qualified tips must not be received in the course of a trade or business that is a specified service trade or business (SSTB).
The OBBBA allows individuals an above-the-line deduction for qualified tips and qualified overtime compensation received in the 2025–2028 calendar years, subject to certain limitations and phaseouts. The new law also requires service recipients (i.e., employers) to separately report the amount of qualified tips (along with specified occupation details) and qualified overtime compensation to workers on Form W-2 or Form 1099-NEC, as applicable. This is a significant shift from prior reporting practices, where tips and overtime were generally aggregated with regular wages on Forms W-2 or 1099 without occupation details.
A qualified tip is generally defined as an amount paid in cash or by charge card to an individual in an occupation that traditionally receives tips, as long as the tip is voluntary. Qualified overtime compensation is generally defined as overtime compensation required under Section 7 of the Fair Labor Standards Act (FLSA) that is in excess of the individual’s regular rate of pay (i.e., only the required overtime premium appears to qualify).
Earlier guidance (Notice 2025-62) granted employers temporary penalty relief for 2025 from the new reporting requirements. As a result, employers and other payors will not be required to separately account for cash tips or qualified overtime compensation on Forms W-2 or 1099 for this year. However, Notice 2025-62 encouraged employers to provide employees with separate accountings of cash tips (with occupation codes) and overtime compensation to assist them in determining eligibility for the 2025 deductions.
For example, employers can voluntarily provide such information through an online portal, in written statements furnished to an employee, in Box 14 of an employee’s Form W-2 (in the case of overtime compensation), or through other secure methods.
In the absence of this voluntary information reporting by employers for 2025, Notice 2025-69 provides guidance for individual taxpayers claiming either deduction.
With respect to qualified tips, Notice 2025-69 provides guidance and examples on how employee and nonemployee service providers should determine the amount of qualified tips that may be deductible in 2025, including four specific approaches for employees.
While the statutory language (Section 224 of the OBBBA) provides that qualified tips may not be received in the course of a trade or business that is an SSTB (as defined in Section 199A(d)(2) — for example, health, law, accounting, performing arts, consulting, athletics or financial services), Notice 2025-69 provides transition relief for taxpayers in this area.
The IRS acknowledged in the notice that additional guidance is needed for employees and employers to make this determination and provides transition relief until Jan. 1 of the first calendar year following the issuance of final regulations that include this additional guidance. Until the end of the transition period, the IRS will treat an employee as having received tips in the course of a trade or business that is not an SSTB if the employee is in an occupation that traditionally receives tips ( regardless of whether the employer’s trade or business is a SSTB).
Grant Thornton insight:
Under this new transition relief, it is not clear whether an employer or an employee in 2025 can elect to apply the statutory language (and applicable guidance provided in proposed regulations issued in September) to determine whether a tip is qualified based on the employer’s trade or business — that is, elect not to apply the new transition rule based on an employee’s occupation. Application of the statutory language and proposed guidance may produce a different determination based on the particular facts and circumstances.
Taxpayers may rely on the proposed regulations (including guidance on the SSTB determination) for taxable years beginning after Dec. 31, 2024, and until the date the final regulations are published, provided that taxpayers follow the proposed regulations in their entirety and in a consistent manner.
This new transition relief provided in Notice 2025-69 does not address how, or if, it impacts the reliance provisions in the proposed regulations issued in September.
Notice 2025-69 also provides guidance and examples on how employees should determine the amount of qualified overtime compensation that may be deductible in 2025. If an employer does not voluntarily provide an employee with the amount of qualified overtime compensation paid in 2025, the notice indicates that the employee can determine the amount based on other documentation such as earnings or pay statements, invoices, or similar statements that support the determination, using one of the seven “reasonable” methods. The IRS also requires that employees maintain copies of any documents they rely on.
If an employer does not voluntarily provide the amount of qualified overtime compensation in 2025, the notice indicates that an employee must make a reasonable effort to determine whether they are an FLSA-eligible employee, which may include asking their employer about their status under the FLSA.
Grant Thornton insight:
Although employers have been granted relief from the OBBBA reporting requirements for 2025, employers who do not voluntarily elect to provide such information should anticipate questions from employees and other service providers, including requests for information regarding overtime paid in 2025 and whether a particular employee is an FLSA-eligible employee.
Notice 2025-69 indicates that the IRS expects to issue several additional items of guidance regarding both new deductions, including regulations on how to determine whether an employer is an SSTB for purposes of qualified tips.
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