The One Big Beautiful Bill Act (OBBB) created new deductions allowing certain individuals to deduct from income qualified tip income and qualified overtime compensation. The Act also created new requirements for employers to report information related to these types of qualified income to employees on informational tax forms such as the Form W-2. The Treasury Department later stated that tax forms would not be updated for tax year 2025 to allow for these additional reporting requirements.

This created a few conflicts:

• The new law requires employers to report the income that qualifies for these deductions to employees, but the current forms do not provide places to report this income.
• Employees will need this information to claim the deduction, but would have no way to determine the appropriate amounts without disclosure on the appropriate tax forms (i.e., Form W-2).

IRS Notice 2025-69, published Nov. 21, provides a resolution to these questions and guidance for individuals on how they may claim the deductions on their 2025 tax returns.

Deduction guidance in brief

Transition year: The Notice reinforces that the tax forms will not be updated for tax year 2025 and therefore designates 2025 as a transition year with regard to these deductions. Individuals will be allowed to claim the deductions they are eligible for without information provided by their employer in the standardized format described in OBBBA.

Calculations for employee claims: The Notice also acknowledges the challenge of accurately calculating the income that qualifies for these two deductions as employers were not required to track either type of income prior to OBBBA’s mid-year passage. With that in mind, the Notice provides multiple methods an individual may utilize to calculate their qualified tip income and qualified overtime compensation from information that may be provided by their employer. In short (see Notice for full guidance):

• Qualified tip income can be estimated using tip income information reported on the tax return or reported by the employee to the employer on Form 4070.
• For qualified overtime compensation, the Notice gives various methods depending on how much the employee is paid in overtime and how many hours they worked.

Examples are also provided for clarity.

Relief for SSTBs: Relief is also granted with regards to the rule that tipped employees who are engaged in a specified service trade or business (SSTB) are not eligible for the deduction. Per the Notice, “the IRS will treat the employee as having received tips in the course of a trade or business that is not a specified service trade or business if the employee is in an occupation that customarily and regularly received tips on or before Dec. 31, 2024, as provided by the Secretary.” In other words, provided that the individual works in an occupation designated as “customarily and regularly” tipped under previously released Treasury guidance, an individual need not worry if they are in a specified service trade or business for purposes of their 2025 deduction. These occupations include (but are not limited to) many occupations in food service, hospitality, entertainment, home services, personal services and wellness, and transportation.

What does CohnReznick think?

These deductions may be beneficial for employees and contractors in a wide range of occupations. Individuals should assess if they may be eligible for the deductions. If so, they should review the allowable methods for calculating qualified tip income and qualified overtime compensation in conjunction with their tax advisor as part of their year-end planning for 2025 and 2025 tax filings, confirming the deduction is appropriately accounted for.