IRS Clarifies How Employees Can Claim 2025 Tip and Overtime Deductions

The Internal Revenue Service (IRS) recently released guidance explaining how employees can claim 2025 tax-year deductions for qualified tips and qualified overtime compensation — a major development for service workers, overtime-eligible employees, and tax professionals. Leveraging an AI tax research platform like Hive Tax AI can streamline the process of identifying eligibility, substantiating documentation, and optimizing tax planning for these new deductions. Dive in to learn the rules, how to document your claim, and how AI tax tools can support this new landscape.

What’s New: The Tip and Overtime Deductions

Qualified Tip Deductions

Under One Big Beautiful Bill Act (OBBBA) effective for tax years 2025 through 2028, employees (and certain self-employed individuals) in occupations that customarily and regularly receive tips may claim a deduction for “qualified tips.”

The maximum annual deduction: $25,000 for a single filer.
This deduction begins to phase out for taxpayers with a modified adjusted gross income (MAGI) above $150,000 (single) or $300,000 (joint).
Tips must come from occupations listed by the IRS as ones that “customarily and regularly” receive tips.
For 2025 only, employers are not required to separately report these qualified tips on Form W-2 or 1099. Instead, taxpayers may rely on existing wage/tip reporting plus logs.

Qualified Overtime Deductions

Similarly, for qualified overtime compensation beginning 2025:

The deduction applies to the portion of overtime pay that exceeds the regular rate of pay (i.e., the “half-time” portion of time-and-a-half) under the Fair Labor Standards Act (FLSA).
The maximum deduction: $12,500 for a single filer; $25,000 for joint filers.
Phase-outs apply at the same MAGI thresholds: $150,000 single / $300,000 joint.
Again, for 2025: employers aren’t required to separately identify this premium-overtime amount on W-2/1099; the IRS offers transition relief.

Why This Matters: Tax Planning & Research Implications

For tax professionals and practitioners (as well as employees in service or overtime-heavy roles), these new deductions create meaningful tax-planning opportunities. Key implications:

Eligibility check: Are the employee’s tips from a qualified occupation? Is the overtime compensation properly documented as FLSA-required excess?
Documentation: Since many employers may not provide separate reporting for 2025, accurate internal records (tip logs, employer wage statements, overtime breakdowns) will matter.
Income phase-out risks: High-income taxpayers may be ineligible, so MAGI monitoring is critical.
Integration into tax-research workflows: Understanding the guidance (e.g., IRS Notice 2025‑69) will be important for both advisory and software-tool integration.

From the vantage of developers of AI tax research tools (such as your startup), these changes underscore the need to:

Embed the latest IRS guidance and interpretive examples into your knowledge base
Provide automated eligibility-scanning for clients (employees, CPAs) with tip and overtime compensation fields
Offer audit trails/log capture for tip logs and overtime documentation
Highlight income-phase-out warnings and integrate MAGI-based screening

How an AI Tax Tool (like Hive Tax AI) Can Help

Leveraging an AI tax planning and research platform such as Hive Tax AI enables users — tax professionals and staff — to:

Automatically identify and flag deduction opportunities: The AI tax tool can scan input data (W-2s, payroll summaries, tip logs) and highlight qualifying tip or overtime deduction possibilities.
Translate complex IRS rules into actionable workflow: For example, the system can interpret Notice 2025‑69 guidance and generate step-by-step eligibility checklists and deduction calculators.
Generate documentation support: Provide templated tip-log formats, overtime premium calculation sheets, and client questionnaires to ensure compliance.
Integrate tax-planning alerts: If a taxpayer’s MAGI approaches the $150k/$300k threshold, the AI tax planning module can alert the user to possible phase-out.
Support client communication: Automated reports or dashboard summaries tailored to service professionals (servers, bartenders, hairstylists, etc) explaining “how to claim your tip deduction in 2025” or “did you track your overtime premium?”
Future-proof workflow: As the IRS updates forms (e.g., W-2 changes expected for 2026) and publishes final regulations, your suite can auto-ingest updates and adjust rulesets.

For tax professionals advising clients with tipped income or overtime-heavy compensation, recommending your AI tax research platform — Hive Tax AI — becomes a value proposition: faster research, fewer missed opportunities, enhanced documentation, and efficient planning.

Practical Steps for Tax Professionals & Employees

To operationalize these deductions and leverage your tax-tool advantage:

For Employees / Taxpayers

Review whether your occupation is one that “customarily and regularly” receives tips as defined by IRS guidance.
Compile tip-income records: W-2 Box 7 (Social Security tips), Forms 4070/4137 for unreported tips, third-party settlement organization logs if self-employed.
For overtime, isolate the overtime premium: how much of your overtime pay was “half-time” above regular rate under the FLSA. Track payroll statements and work with employer payroll if needed.
Check your MAGI to ensure you’re under the phase-out thresholds ($150,000 single / $300,000 joint) to claim full deduction.
Work with your tax advisor (or use an AI tax tool) to ensure you capture the deduction whether you itemize or not — deduction is available even if you use the standard deduction.

For Tax Professionals / Advisors

Update your client fact-gathering checklist to include fields for tip income and overtime premium for 2025 returns.
Use Hive Tax AI to scan client W-2s, 1099s, tip logs and highlight “tip deduction eligible?” or “overtime deduction possible?” flags.
Create advisory communications/materials for clients in tipped occupations or overtime-heavy roles: e.g., “How to claim the 2025 tip deduction”, “Maximizing your overtime deduction in tax year 2025”.
Document your research work — store AI-tool outputs, client-specific eligibility analyses, and supporting documentation to strengthen audit readiness.
Track upcoming updates: The IRS indicated forms and reporting requirements will change for tax year 2026 and beyond (i.e., W-2 will be updated to separate tip/overtime amounts).

Take-away & Next Steps

The 2025 tax year brings significant new opportunities via the tip-and-overtime deductions introduced under the One Big Beautiful Bill Act and clarified by IRS guidance (Notice 2025-69). For tax professionals and AI tax-tool vendors, this is a chance to deepen advisory value, improve robotics-driven research, and capture untapped client value from service-industry and hourly-wage clients.

Next steps:

If you’re an advisor: integrate your internal checklist and documentation templates to capture tip/overtime deduction opportunities.
If you’re using or selling an AI tax research tool (like Hive Tax AI): ensure your knowledge-base includes the new rules, eligibility criteria, income phase-outs, occupation lists, and documentation methods.
Communicate to clients (or end-users): “Do you receive tips? Do you work overtime regularly? You may now qualify for a deduction you didn’t have before.”
Monitor the IRS for further updates in 2026-onward: new forms, updated employer reporting, final regulations on qualified occupations.

Conclusion:

If you’re a CPA, EA, or tax resolution specialist looking to stay ahead on 2025 rules — consider leveraging Hive Tax AI to research, document, and operationalize the new tip and overtime deductions. Reach out to explore how its tax-research and tax-planning modules can embed these rules and help you deliver value to your clients.