Under the bill, workers may be eligible for new deductions for tax years 2025 through 2028 if they received qualified tips, with the maximum annual deduction being $25,000. This amount phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).
To calculate tips that qualify for deduction, employees can use the total amount of social security tips reported in box 7 of the Form W-2 or the total amount of tips reported to the employer on all Forms 4070 or similar forms.
However, if the employer chooses to report the tip amount in box 14 of Form W-2, or separately, the employee may use this amount to calculate qualified tips.
In addition to these options, workers may include any amount listed on line 4 of the 2025 Form 4137 filed with the employee’s 2025 income tax return.
Form W-2 for 2025 has not been modified to account for the new tips reporting requirements. As such, “employers are not required to separately account for cash tips on the written statements furnished to individuals for 2025.”
The IRS notice said that the employee is responsible for making sure their job matches a profile “that customarily and regularly” receives tips.
As for non-employees, these individuals may deduct an amount equal to the qualified tips on Forms 1099-MISC, 1099-NEC, or 1099-K, which are subject to certain limitations.
In order for the worker’s overtime pay to be qualified, the individual must be FLSA-eligible.
If an individual is paid such overtime compensation and receives a yearly statement that separately accounts for the overtime premium, which is generally the half portion of the one and one-half times amount, they may use that separate amount for calculations.
If the statement does not separately account for the FLSA Overtime Premium, but includes the aggregate dollar amount of the overtime combined with wages for regular hours, the individual may use one-third of that aggregate dollar amount.
Now, if the statement separately accounts for the overtime amount, but the individual is paid at a rate of two times the regular rate, they may multiply that separate amount by an appropriate fraction to approximate the overtime premium.
The notice listed multiple scenarios for calculating overtime amounts along with examples.
State Taxes and Dividends
At the state level, multiple states, including Texas, Wyoming, and Florida, have done away with taxes on tips and overtime pay.
In October, Michigan Gov. Gretchen Whitmer signed a bill removing state taxes on tips, overtime pay, and social security benefits. The change is expected to save “hundreds of thousands of seniors and working families money on their taxes every year,” said the lawmaker’s office.
Meanwhile, the Trump administration has suggested that more tax benefits could be coming soon for Americans.
Treasury Secretary Scott Bessent indicated that this dividend could also come in other forms, including lower taxes.
“We know these refunds will make a huge difference for Americans to help pay down their bills and use towards life’s expenses,” she said.
“President Trump’s entire economic agenda is aimed at putting more money back into the pockets of hard-working Americans. That’s why he signed the largest middle-class tax cuts in history into law, from no tax on overtime, no tax on tips, to no tax on social security.”
One of the revised provisions was the standard deduction. For 2025, the One Big Beautiful Bill Act had set the standard deduction at $15,750 for single individuals, which rises to $16,100 in 2026, said the IRS.
