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Recently released frequently asked questions (FAQs) (FS-2026-01) about the new deduction for qualified overtime compensation aim to clarify how taxpayers can apply the incentive when filing their personal income taxes.
The One Big Beautiful Bill Act allows individuals an above-the-line deduction for qualified tips and qualified overtime compensation received in the 2025–28 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.
The FAQs the IRS has released are consistent with the guidance it issued last fall in Notice 2025-69, which addressed both of the new deductions.
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 2025. However, the 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.
The new FAQs include links to the 2025 Form 1040 Schedule 1-A (and instructions), which is the schedule individual taxpayers must use to claim the deductions. The instructions provide significant information regarding the new deductions, including specific examples and descriptions of the transition rules for 2025.
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