IRS “No Tax on Tips and Overtime” Rules (With IRS Examples) 2025

Editorial disclaimer: This article is for general information only. It is not legal or tax advice. Tax rules can change. Outcomes depend on each taxpayer’s facts. Consider consulting a qualified tax professional. Primary sources are linked inline from official U.S. government guidance.

For tax years 2025 through 2028, eligible workers may claim new federal deductions for qualified tips and qualified overtime compensation. The Internal Revenue Service explains the overview and key limits in its guidance on how to take advantage of no tax on tips and overtime.

For tax year 2025, the U.S. Treasury and the IRS issued detailed methods and examples. The guidance is summarized in Treasury and IRS guidance for individuals who received tips or overtime during tax year 2025.

What changed for 2025

The deductions are above-the-line. That means they can reduce income before adjusted gross income is calculated. The deduction can apply even if the taxpayer does not itemize. The IRS confirms this structure in its 2025 guidance release.

Qualified tips

Qualified tips generally include tips voluntarily received from customers for services. Tips must still be reported as income. The IRS explains this reporting point in its tips and overtime overview.

For tipped workers, the maximum annual tips deduction is $25,000. The deduction phases out for modified adjusted gross income over $150,000. The joint filer threshold is $300,000. The IRS states these thresholds in its 2025 guidance release.

Qualified overtime compensation

Qualified overtime compensation generally means the pay that exceeds the regular rate. It is commonly the extra “half” in time-and-a-half pay required under the Fair Labor Standards Act. The IRS describes this concept in its 2025 guidance release.

The maximum annual overtime deduction is $12,500. The maximum for joint filers is $25,000. The phase-out thresholds match the tips rules. The IRS lists these figures in the 2025 guidance release.

IRS examples for tax year 2025

The examples below are based on the IRS and Treasury examples published for tax year 2025. Amounts and computations are included to show the method. For full context, see Treasury and IRS guidance for individuals who received tips or overtime during tax year 2025.

Tips example 1: Waiter with reported tips on Form W-2

Ann is a restaurant server. Her 2025 Form W-2 reports $18,000 of Social Security tips in box 7. Ann does not report additional tips on Form 4137. Under the IRS example, Ann may use $18,000 to determine her qualified tips for tax year 2025. See the IRS example in the 2025 tips guidance.

Tips example 2: Bartender with W-2 tips and Form 4137 tips

Bob is a bartender. He reports $20,000 in tips to his employer during 2025 on Forms 4070. He also reports $4,000 of unreported tips on Form 4137. Bob’s 2025 Form W-2 shows $15,000 of tips in box 7. Under the IRS example, Bob may use either $15,000 or $20,000 to determine qualified tips. He may also include the $4,000 reported on Form 4137 in that qualified tips amount. See the IRS example in the 2025 tips guidance.

Tips example 3: Self-employed travel guide with 1099-K totals and tip logs

Doug is a self-employed travel guide. In 2025, he receives $7,000 in tips paid through a third-party settlement organization. He receives a Form 1099-K showing $55,000 of total payments. The form does not separately list tips. Doug keeps daily tip logs showing dates, customers, and tip amounts. Under the IRS example, Doug may use $7,000 to determine qualified tips for tax year 2025. See the IRS example in the 2025 tips guidance.

Overtime example 1: Payroll statement shows the overtime premium

Andrew works overtime during 2025. His payroll statement shows $5,000 as the overtime premium paid during the year. Under the IRS example, Andrew may include $5,000 as qualified overtime compensation for tax year 2025. See the IRS example in the 2025 overtime guidance.

Overtime example 2: Payroll statement shows only total overtime pay

Assume the same facts as Andrew’s first example. This time, the payroll statement shows a total overtime amount of $15,000. This total includes both the overtime premium and the regular wage portion for overtime hours. Under the IRS example, Andrew determines the premium by dividing $15,000 by 3. The result is $5,000, which is the qualified overtime compensation amount used for the deduction. See the IRS example in the 2025 overtime guidance.

Overtime example 3: Employer pays overtime at double time

Brad’s employer pays overtime at two times the regular rate. Brad receives $20,000 in overtime pay during 2025. His last pay stub shows overtime of $20,000 for the year. Under the IRS example, Brad determines the qualifying premium by dividing $20,000 by 4. The result is $5,000, which is the qualified overtime compensation amount for the deduction. See the IRS example in the 2025 overtime guidance.

Overtime example 4: Law enforcement “work period” overtime

Carol is a covered, nonexempt employee under the FLSA and works in law enforcement. She is paid $15,000 of overtime on a 14-day work period basis that complies with the FLSA. Under the IRS example, Carol determines the qualifying premium by dividing $15,000 by 3. The result is $5,000, which is the qualified overtime compensation amount for the deduction. The IRS example also references U.S. Department of Labor guidance on law enforcement and fire protection employees in Fact Sheet #8 under the FLSA.

Overtime example 5: Compensatory time paid out

Diane works for a state or local government agency. The agency provides compensatory time at a rate of one and one-half hours for each overtime hour worked. In 2025, Diane is paid $4,500 for compensatory time off based on overtime. Under the IRS example, Diane determines the qualifying premium by taking one-third of $4,500. The result is $1,500, which is the qualified overtime compensation amount for the deduction. See the IRS example in the 2025 overtime guidance.

Record-keeping and reporting

Income reporting still applies. Tips and overtime must be reported as income even when a deduction may be claimed. The IRS explains this sequence in its tips and overtime overview.

For tax year 2025, employers may not separately report all the amounts needed for the deduction on information returns. The IRS explains that workers may need to determine deductible amounts without a separate employer accounting. This is described in the Treasury and IRS 2025 guidance release.

Keep clear records. Use pay stubs, payroll statements, and tip logs. Keep support for any allocation method used. This approach aligns with the IRS discussion in its 2025 guidance release.

Reporting forms and documentation

The new deductions do not change income reporting rules. Tips and overtime compensation must still be reported in full. The deduction is claimed after income is properly reported. The IRS explains this sequence in its overview of the no tax on tips and overtime provisions.

For employees, tip income is commonly reported on Form W-2. Social Security tips appear in box 7. Other wages, including overtime pay, appear in box 1. These reporting rules continue to apply for tax year 2025. The IRS addresses this treatment in its 2025 guidance for individuals who received tips or overtime.

Some employees may be required to report tips directly to the IRS. This can occur when tips were not fully reported to the employer. In those cases, the taxpayer reports the additional tips on Form 4137. The IRS discusses this reporting obligation in the Treasury and IRS 2025 guidance.

Self-employed individuals may receive information returns that include tip income. Forms such as Form 1099-K, Form 1099-NEC, or Form 1099-MISC may report gross payments but may not separately identify tips. The IRS explains how records may be used to determine qualified tips when forms do not break out tip amounts in its 2025 guidance release.

For overtime compensation, payroll records are the primary source of information. Employers may or may not separately identify the overtime premium portion. When the premium is separately stated, that amount may be used directly. When it is not stated, the IRS allows reasonable methods to determine the qualifying portion. This approach is described in the Treasury and IRS guidance for tax year 2025.

Taxpayers should retain supporting documentation. This includes Forms W-2 and 1099, payroll statements, tip logs, and any worksheets used to calculate qualified tips or qualified overtime compensation. The IRS emphasizes documentation and record retention in its 2025 guidance for individuals.

Conclusion

The new deductions can reduce taxable income for eligible workers. They also add new documentation and calculation steps. Use the IRS overview for the big picture in how to take advantage of no tax on tips and overtime. Use the tax year 2025 methods and examples in Treasury and IRS guidance for individuals who received tips or overtime during tax year 2025.