New for 2025! Two deductions may help reduce taxable income: one related to qualifying cash tips and another tied to qualifying overtime pay. While these deductions are now in effect, eligibility depends largely on how income was earned, classified, and reported during the year.
What Are These Deductions?For the 2025 tax year, certain taxpayers may be eligible to deduct:
Qualifying cash tips, and
Qualifying overtime pay
These deductions are designed to apply to specific types of income and do not automatically apply to everyone who earned tips or worked overtime. Proper payroll reporting and worker classification are key factors in determining eligibility.
The cash tips deduction is intended for workers in occupations that traditionally received tips prior to 2025, such as roles in restaurants, hospitality, and similar service industries.
To qualify:
Tips must be voluntary, whether received in cash or charged to a card
Mandatory service charges do not qualify
Tips must come from occupations that customarily received tips
The deduction is capped at $25,000, with phaseouts beginning for earners with a gross income of over $150,000.
Example:
A restaurant server who earned $8,000 in qualifying cash tips during 2025 may be able to deduct that amount, subject to income limits and proper reporting.
The overtime deduction applies to non-exempt, hourly employees covered by federal labor rules. Importantly, this deduction applies only to the overtime premium portion of pay, not total overtime earnings.
To qualify:
The employee must be non-exempt (hourly)
Only the premium portion of overtime pay qualifies (the additional amount earned for hours worked over 40 in a week)
Salaried employees and bonuses for extra work do not qualify
The maximum deduction is $12,500 for single filers ($25,000 for joint filers), with phaseouts for earners with a gross income of over $150,000.
Example:
If an hourly employee earns $20 per hour and works overtime at time-and-a-half, only the extra premium portion of that pay may qualify for the deduction.
These deductions rely heavily on accurate payroll and income reporting. Supporting documentation may include:
W-2 forms
Year-end pay statements
Payroll records clearly identifying tips and overtime premiums
Note: For 2025, employers are not required to separately list qualifying tips or overtime premiums on W-2s or 1099s, which is why reviewing your pay statements and records matters.
If you earned tips or overtime during 2025, consider:
Reviewing your payroll documents for clarity and accuracy
Asking questions before filing if something seems unclear
Understanding whether these deductions apply depends on accurate payroll data and proper classification.
Our team can help you apply these deductions and file your individual tax return.
This guidance is based on information released by the IRS regarding tip and overtime deductions for the 2025 tax year. This provision is set to expire in 2028. Don't miss out!