Hello Valued Clients,
The IRS recently issued Notice 2025-69, which provides important clarification—and temporary flexibility—for the new tip and overtime deductions for tax year 2025 only. More formal reporting requirements are still expected to take effect beginning in 2026.
Below is a summary of what this means, with a focus on employee requirements for tax preparation and employer reporting expectations.
Tip Deduction – 2025
Employee Requirements (for tax preparation)
To qualify for the deduction:
Tips must be reported as income.
If tips are not fully or separately reported, employees may rely on:
Box 7 of the W-2
Form 4137
Personal tip logs, provided the tips were reported as income
Tips received in occupations that customarily received tips prior to 12/31/2024 remain eligible for 2025.
Employer Reporting – 2025
Employer reporting requirements are relaxed for 2025.
Employers are not required to separately report cash tips to the IRS on W-2s or 1099s for 2025.
Overtime Deduction – 2025
Employee Requirements (for tax preparation)
If “qualified” overtime is not separately reported, employees may use a reasonable method to estimate it. Common approaches include:
½ of the overtime premium if paid at double time
Example:
If your final 2025 paystub shows an overtime premium of $10,000 (or total overtime pay of $20,000), the qualified overtime compensation is $5,000.⅓ of total overtime pay if paid at time and a half
Example:
If your final 2025 paystub shows an overtime premium of $15,000, the qualified overtime compensation is also $5,000.
Employer Reporting – 2025
Employers are not required to separately report qualified overtime on W-2s or other statements for 2025.
That said, separate reporting remains best practice to reduce confusion and minimize employee issues.
Looking Ahead to 2026
Beginning in 2026, reporting is expected to move directly onto the W-2.
Employers who use 2025 to clean up payroll processes and reporting will be better positioned for a smooth transition.
Electronic Payment Update
In March 2025, the President signed Executive Order 14247, effective September 30, 2025, directing all federal agencies—including the IRS and Treasury—to transition to electronic payments and receipts and phase out paper checks where permitted by law.
As a result:
All payments to and from the government must be made electronically, including:
Federal tax deposits
Estimated tax payments (including the January 15, 2026 payment)
Balances due with tax returns
Income tax refunds
Limited exceptions may apply; however, requesting a paper refund check will likely delay your refund.
If banking information is not provided, the IRS may attempt to obtain it or determine whether an exemption applies.
Clients who do not currently use electronic payment methods should plan ahead to ensure compliance and avoid delays or penalties.
Action Items for 2025
Review your payroll and understand the rules for tip and overtime deductions.
Ensure all IRS payments and refunds are set up for electronic processing.
Confirm your banking information is accurate—we will also verify this during tax preparation.
If you have questions or would like assistance reviewing your payroll or payment setup, please don’t hesitate to reach out.
Thanks again for your past patronage and the trust you have placed in us to prepare your tax return. We look forward to hearing from you again next year!
Sincerely,
Busek Olson & Associates | Taxman | West Fargo Tax & Accounting
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