Tax Planning
Leveraging Overtime & Tips Deductions Under the One Big Beautiful Bill
New IRS guidance allows individuals to claim information reporting deductions for tips and qualified overtime pay in 2025—here’s how to plan now to maximize the benefits.
By NomadicTax Research Team • 5-8 min read • November 24, 2025
## What’s New
Under the One Big Beautiful Bill (OBBB), workers can now deduct **qualified overtime compensation** and **cash tips** when an employer is required to pay them under the Fair Labor Standards Act. The IRS released guidance on November 21, 2025 clarifying eligibility criteria for the deduction. ([irs.gov](https://www.irs.gov/newsroom?utm_source=openai))
## Key Requirements
- The overtime or tips must be **required by FLSA** (i.e., legally compulsory). Voluntary or contract-based overtime typically doesn’t qualify. ([irs.gov](https://www.irs.gov/newsroom?utm_source=openai))
- Proper **information reporting** by employers or payors is essential. Employers must issue appropriate statements so workers can substantiate deductions. ([irs.gov](https://www.irs.gov/newsroom?utm_source=openai))
- For 2025 only, the IRS is offering **penalty relief** for employers/payors who fail to comply with new reporting rules, to ease the transition. ([irs.gov](https://www.irs.gov/newsroom?utm_source=openai))
## How this Impacts You
| Scenario | What you need to do |
|---|---|
| You receive cash tips (mandatory) | Keep employer statements; track amounts carefully. |
| You regularly work paid overtime (mandatory overtime wage law) | Document hours; ensure employer reports correctly. |
| Employer doesn’t provide necessary info | Request it; if missing, it can limit your ability to deduct. |
## Actionable Planning Tips
- Review your **paystubs** to verify overtime payments and tip stipends. Keep all documentation (receipts, employer statements).
- Speak with your employer about their reporting practices—ensure they meet IRS criteria for proper reporting.
- If you are a tax preparer, inform clients about these changes so deductions aren’t missed.
- Even with penalty relief, aim for compliance in filing—keep detailed records in anticipation of audits.
## Example
Imagine Sarah, a server whose employer mandates a 2.5% tip-out of every sale. She also earns FLSA-mandated overtime when working more than 40 hours a week. Under the new guidance, Sarah can deduct both her **mandatory tips** and **overtime pay**, reducing her taxable income, assuming her employer provides proper reporting.
## Bottom Line
This change opens new deduction opportunities for many hourly workers. To take advantage, ensure your overtime or tips are **required** by law, documented, and properly reported. Employers also need to align their reporting systems. Planning ahead today can help you avoid unnecessary tax surprises next filing season.