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IRS Issues Guidance for Individuals with 2025 Tip & Overtime Income
By Melissa Low
On November 21, the Department of the Treasury and the Internal Revenue Service (IRS) issued
guidance for workers eligible to claim the deduction for tips and overtime compensation for 2025. The IRS opted not to modify the W-2 and Form 1099 forms for 2025.
The notice explains and shows examples of how individual workers can determine the amount of their deduction without receiving a separate accounting statement from their employer.
Tip Income
Individuals in an occupation which traditionally and customarily receives tips qualifies for the above-the-line deduction. The annual deduction limit: $25,000, and the deduction begins to phase out at $150,000 (modified adjusted gross income) for an individual or $300,000 for a joint return.
A qualified tip is an “amount… paid voluntarily… determined by the payor.” This generally does not include automatic gratuities or service charges.
For evaluating tip income, an employee may:
- Use the total amount of social security tips reported in box 7 of the Form W-2;
- Use the total amount of tips reported by the employee to the employer on all Forms 4070, Employee’s Report of Tips to Employer (or any similar substitute form used to monthly report tips to the employer); or
- If an employer voluntarily chooses to report the amount of an employee’s cash tips in box 14 of Form W-2 (or on a separate statement), the employee may use this amount in determining the qualified tip amount for tax year 2025.
In addition to these three options, employees may also include any amount listed on line 4 of the 2025 Form 4137 filed with the employee’s 2025 income tax return (and included as income on that return).
For independent contractors and non-employees who traditionally receive a 1099, the amounts may be shown in total on statement, and the individual should “calculate the amount of qualified tips using earnings statements or other documentation such as receipts, point of-sale system reports, daily tip logs, third party settlement organization records, or other documentary evidence.”
It also provides transition relief to workers who receive tips in the course of a specified service trade or business, as further guidance is needed to assist employees in determining their eligibility.
Access examples for tipped employees.
Overtime Income
Qualified overtime compensation is compensation paid to an employee as required by the
federal Fair Labor Standards Act (FLSA). Employees may deduct the pay that exceeds their regular rate of pay (the premium portion of time and a half pay). This above-the-line deduction is limited to $12,500 annually for an individual or $25,000 for a joint return. Further, the deduction begins to phase out at $150,000 for an individual or $300,000 for a joint return (modified adjusted gross income).
For evaluating overtime income, employers may choose to report the amount of qualified overtime compensation to employees using box 14 of Form W-2 or on a separate statement. For individuals who do not receive a statement, individuals should base the determination using other documentation such as earnings or pay statements, invoices, or similar statements, using a reasonable method to determine the amount of qualified overtime compensation.
Access examples for overtime.
Further Guidance
The IRS is in the process of updating income tax forms and instructions for taxpayers to use this filing season that will assist them in claiming these deductions.
The Cost of Dining Out ~ Washington Hospitality Association
WSU Club Tour
On Thursday, November 13, a group of 11 Washington State University Sigma Iota students and Professor Mark Beattie toured Sand Point CC, Seattle GC and Everett G&CC as part of their Hospitality Business Management program. The tours served as a great introduction to private clubs and spurred a lot of great questions and sincere interest in getting engaged in the club world. Attached are some photos from each of the stops. We anticipate most to all students joining the WSU Student Chapter in the days to come and they are already asking for another club tour next semester (volunteer clubs welcome). Thank you to all of the participating clubs and to their members for supporting the future of our industry through our WSU partnership.
