Filing Your 2025 Taxes? New IRS Tip & Overtime Deductions to Know

New IRS rules allow eligible employees to deduct certain tips and overtime premium pay when filing their 2025 tax return—potentially lowering taxable income and increasing refunds. And beginning in 2026, there may also be a way to access some of that benefit sooner through adjusted tax withholding.

Here’s what employees (and employers) should know.

New Deductions Available When Filing 2025 Taxes

For wages earned during tax year 2025, employees may be eligible to claim two new deductions when filing their 2025 tax return in 2026:

- A deduction for qualified tips

- A deduction for the premium portion of overtime pay

These deductions apply to tax years 2025 through 2028 and are available whether you itemize deductions or take the standard deduction.

Tip Deduction: Up to $25,000

Employees who receive tips may be able to deduct up to $25,000 in qualified tips when filing their 2025 return.

What counts as qualified tips?

Only voluntary, freely given tips qualify.

Eligible tip amounts may include:

- Tips reported on your Form W-2

- Tips reported directly to your employer

- Additional tips reported on Form 4137

- Personal tip logs (where applicable)

What does not qualify?

Mandatory service charges, automatic gratuities, or fees added by the business do not count as qualified tips.

Important note on recordkeeping

There is no change to W-2 reporting. Because tip amounts are not separated for deduction purposes on the W-2, employees should maintain accurate tip records to support their tax filing.

Overtime Deduction: Up to $12,500

Employees who worked overtime in 2025 may be able to deduct up to $12,500 of the premium portion of overtime pay.

This generally refers to the “extra half” in time-and-a-half pay (or the premium portion of double-time).

How the overtime deduction is calculated

- If a paystub lists the overtime premium separately, that amount may be deductible.

- If the paystub shows only total overtime wages, the IRS allows employees to calculate the premium by either dividing total overtime pay by 3 for time-and-a-half, or dividing by 4 for double-time

Employees should retain paystubs or payroll records showing overtime wages.

Income Limits and Eligibility

- Deductions begin to phase out for single filers earning over $150,000, or joint filers earning over $300,000

- These deductions apply for tax years 2025–2028

- Employers do not need to change how wages are reported

Tips and overtime remain subject to Social Security and Medicare taxes.

Looking Ahead: What Changes in 2026?

While the deductions apply to 2025 wages when filing a tax return, there is an additional planning opportunity beginning in 2026.

Starting in 2026, employees may be able to reduce federal income tax withholding during the year by submitting an updated Form W-4 that accounts for expected tip and overtime deductions. This allows eligible employees to see some tax savings reflected in their paychecks rather than waiting until tax filing time.

Employees considering a W-4 adjustment should consult a tax professional to ensure accuracy.

The Bottom Line

- The new IRS deductions apply to wages earned in 2025

- Employees may claim them when filing 2025 taxes in 2026

- Payroll reporting remains unchanged for employers

- Beginning in 2026, employees may optionally adjust withholding to reflect these deductions sooner

Understanding how these rules work can help employees file with confidence—and plan ahead.

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