Employees (and their tax advisors) have been eagerly awaiting guidance on how to take advantage of the promised “no tax on tips and overtime pay."  As a reminder, under the One Big Beautiful Bill Act ("OBBBA"), eligible individuals can deduct qualified tips and overtime pay on their income tax returns for 2025 through 2029. 

IRS Notice 2025-69, issued today, provides instructions on how to calculate the deduction for 2025 tax returns. This guidance is critical because, for 2025 only, employers are not required to provide employees with the new tips and overtime pay information required under OBBBA (see Notice 2025-62). Notably, it appears that these changes generally should not impact the compensation taken into account for employer benefit plans (at least for 2025 as no changes are made to box 1 of Form W-2). 

The Notice clarifies that a tipped employee can use the amount reported in box 7 of Form W-2 (Social Security tips) or reported on Form 4070, plus unreported tips on line 4 of Form 4137 to support the deduction. Non-employees can use earnings statements, tip logs, or other documentation to support their tip amount.  

Notably, the tip deduction is only available if not received as an employee working in a specified service trade or business (SSTB). The IRS is working on regulations for the SSTB determination, but in the meantime, the Notice provides transition relief. Pending additional guidance, the employee only needs to be in an occupation that customarily and regularly received tips before 2025.

Similarly, for overtime pay, the Notice describes a number of different methods to calculate the FLSA overtime premium based on various pay records, and provides helpful examples.  

Lastly, more information on the deduction limit is found in the 2025 Form 1040 Instructions (pending).  This guidance goes a long way to making “no tax on tips and overtime pay” a reality, while avoiding an unreasonable burden on employers, at least for 2025.  And it appears that these changes will not impact the compensation taken into account for employer benefit plans (at least for 2025). Keep up the good work IRS!