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Overtime Wages
Effective for tax years 2025 through 2028, individual taxpayers are eligible to deduct the premium portion of overtime (such as the “half” in “time-and-a-half”) for time worked beyond forty hours in a week. The deduction does not apply to overtime paid due exclusively to state/local law or overtime mandated by employer policy or contracts. For example, if an employee receives eight hours of holiday time, but works 40 regular hours for a total of 48 hours in that week, even if that additional eight hours is paid at an overtime rate per company, state policy or regulation, that overtime does not qualify for this federal deduction because the employee did not work more than 40 hours in the week.
The maximum annual deduction for Single or Head of Household taxpayers is $12,500 and $25,000 for Married Filing Jointly taxpayers. If the taxpayer is married, they must file Married Filing Jointly in order to claim this deduction. This deduction does begin to phase out when Modified Adjusted Gross Income (MAGI) reaches $150,000 for Single or Head of Household taxpayers and $300,000 for Married Filing Jointly taxpayers.
Employers are responsible for filing information returns with the IRS or SSA and furnishing statements to taxpayers showing the total amount of qualified overtime compensation paid during the year. On August 7th, 2025, the IRS announced that there will be no changes to form W-2 for 2025 and they will coordinate with employers, payroll providers, and tax professionals to ensure a smooth transition.
We anticipate the IRS will share additional guidance in the coming months regarding employer reporting, as well as additional guidance regarding how taxpayers can claim this deduction when filing season begins.
Tip Income
Effective for tax years 2025 through 2028, individual taxpayers may deduct qualified tips received in occupations listed by the IRS as “customarily and regularly receiving tips on or before December 31, 2024, and that are reported on a Form W-2, Form 1099, or other specified statement furnished to the individual or reported directly by the individual on Form 4137”. This deduction is available for both employees and self-employed individuals, but not to self-employed individuals working in Specified Service Trade or Business (SSTB) or their employees as defined by the IRS.
The maximum annual deduction is $25,000 and, if the taxpayer is married, he/she must file Married Filing Jointly in order to claim this deduction. Please note this deduction is limited to $25,000 per return, not per person; it does not double for joint filers. This deduction may not exceed an individual’s net income (without regard to this deduction) from the trade or business in which the tips were earned, and begins to phase out when Modified Adjusted Gross Income (MAGI) reaches $150,000 for Single or Head of Household taxpayers and $300,000 for Married Filing Jointly taxpayers.
Employers are responsible for filing information returns with the IRS or SSA and furnishing statements to taxpayers showing the total amount of certain cash tips received and the occupation of the tip recipient. On August 7th, 2025, the IRS announced that there will be no changes to form W-2 for 2025 and they will coordinate with employers, payroll providers, and tax professionals to ensure a smooth transition. Since this is classified as an “above-the-line deduction,” taxpayers can claim this deduction even if they do not itemize. It is expected to be reported on Schedule 1.
We anticipate the IRS will share additional guidance in the coming months regarding employer reporting, as well as additional guidance regarding how taxpayers can claim this deduction when filing season begins.
If you’d like more information on this and other client accounting services topics, please visit our website or call our office at (833) CPA-BMSS to speak with one of our professionals.