Receiving tips or overtime pay can complicate your tax return for this year. The Treasury Department and IRS recently issued guidance for people who received those earnings. If you’re one of these workers, going it alone may cost you time, confusion, and possibly extra tax. With a good tax professional, you can avoid mistakes, claim the correct deductions, and file with confidence.
Understanding the New Guidance from IRS for Tips and Overtime
The IRS and the U.S. Department of the Treasury (Treasury) released new rules for the tax year 2025. They focus on two areas: tips and overtime compensation.
For many workers, tips or overtime pay form an important part of income. Until now, figuring out how to treat these on a tax return was tricky. The new guidance gives clearer rules.
Let’s first look at the tips rules. Then we’ll move to overtime.
IRS Tip Deductions: What You Need to Know
The IRS provided this new directive regarding the deduction of tips earned through employment, whether it be cash, POS, or unreported tips, to assist you in determining the amount.
Essential points are:
- Workers who are entitled to the deduction will, in the case of the tax years 2025-2028, deduct up to $25,000 (dropped above the specified income level) if they meet the conditions.
- The deduction gets eliminated for the modified adjusted gross income (MAGI) exceeding $150,000 ($300,000 for joint filers).
- If you've done your reporting for tips where it says box 7 on your Form W-2, or you have been keeping a log of your tips (say, if you are self-employed or are using a third-party settlement organization), then you can make use of the amounts given.
- For instance: A server whose W-2 box 7 displays $18,000 of social security tips has the benefit of using that amount to figure out qualified tips.
Overtime Compensation: What’s New
The guidance also covers workers who receive “qualified overtime compensation.” This arises when they are paid more than their regular rate under the Fair Labor Standards Act (FLSA) and similar rules.
Key points:
- The eligible deduction for tax years 2025-2028 will be $12,500 for single ($25,000 for married couples) taxpayers.
- The deduction will gradually decline as the taxpayer's MAGI exceeds $150,000 ($300,000 for married couples).
- The deduction will be applicable regardless of the choice between itemizing and taking the standard deduction.
- Example: If a payroll statement shows “overtime premium” of $5,000, that $5,000 may count as qualified overtime compensation.
What This Means for You
If you received tips or overtime in 2025:
- You may qualify for a deduction and lower your taxable income.
- Make sure your records accurately show tips or overtime premium.
- Your tax preparer or service should be aware of these rules.
- You should check your Form W-2, any Form 1099, or third-party payment statements.
- Filing correctly now can avoid problems later (e.g., IRS notices, corrections).
Why Using Professional Tax Preparation Services Makes Sense This Year
Given the new rules, it’s wise to consider using tax preparation services Here’s why.
Tax preparers stay updated on IRS changes. They know how to apply the new tips and overtime rules. They also know how to document qualifying amounts and deductions.
Next we’ll look at how using a service can save you time.
Time-Savings and Reduced Stress
Preparing returns with tips or overtime can be complicated. When you use a tax service:
- You hand the documents to a pro.
- They handle the calculations and filings.
- They help you avoid errors.
This frees your time and lowers your stress.
Lower Risk of Mistakes or Penalties
IRS rules are strict. Mistakes can cause delays, audits, or extra tax. A tax professional will help:
- Review your W-2/1099 forms
- Validate tip logs or overtime premiums
- Ensure the correct deduction is claimed
- Help with supporting documentation
Better Use of New Deductions
The tips and overtime rules open potential savings. A preparer can help you claim them properly. They also help you stay within phase-out rules (MAGI thresholds) and file accordingly.
Filing for Individuals and Self-Employed
If you are a waiter, bartender, or self-employed guide (e.g., the “Doug” example in the guidance) you may have additional complexity. The right tax service knows how to handle third-party settlement organization payments and unreported tips.
How to Choose the Right Tax Service in the USA
With many options out there, you want to pick someone reliable and qualified.
Credentials and Authorization
Ensure the preparer is authorized by the IRS (PTIN number) and has experience relevant to your situation (tips, overtime, self-employment, etc.).
Transparent Fees and Cost Awareness
Know the cost up front. Tax filing fees 2026 will vary depending on complexity. Ask:
- How many forms will I need?
- Are tip/overtime deductions included?
- What is the flat fee or hourly rate?
- Are state returns included?
Documentation and Record-Keeping
Your tax service should ask for and keep records. For tips or overtime you’ll want:
- W-2 forms with box 7 (social security tips)
- Logs of tips if third-party payments
- Payroll statements showing overtime premium
- Any Form 1099 or settlement statements
Year-Round Support and Follow-Up
Choose a service that:
- Stays available after filing
- Responds to IRS notices
- Helps with amendments or audits if needed
Preparing for Your Tax Filing with the New IRS Guidance
Knowing these rules helps you gather the right information and be ready.
Step 1: Collect Your Documents
For 2025 you should gather:
- Form W-2 forms (especially box 7)
- Pay stubs showing tip amounts or overtime premium
- Logs of cash tips (date, amount, customer) if third-party payments
- Form 1099-K or other 3-party statements if self-employed
- Any other income documents
Step 2: Identify Whether You Qualify
Ask yourself:
- Did I receive tips in 2025?
- Did I receive overtime above the regular rate?
- Is my MAGI below phase-out thresholds ($150k single; $300k joint)?
- Do I keep detailed records?
If yes, you may qualify for deductions.
Step 3: Work with Your Tax Preparer or Service
Share all records with them. Ensure they know about the new guidance. Ask them to:
- Review eligible tips or overtime premium
- Apply correct deduction amounts
- Ensure correct phase-out calculations
- File smoothly and accurately
Step 4: Keep Records for Audit or Review
Even if you file correctly, the IRS may review. Keep:
- Tip logs, if you use them
- Payroll statements showing overtime breakdown
- Forms used (W-2, 1099-K)
- Correspondence with your preparer
Helpful Links
- 2026 IRS Retirement Contribution Limit Increases
- IRS Reminds Tax Professionals to Renew PTINs for the 2026 Tax Season
- IRS Reinstates $20,000 and 200-Transaction Reporting Threshold for Form 1099-K
Gaining an insight into the IRS's recommendations regarding tips and overtime pay in the taxation period of 2025 will grant workers the opportunity to save and not get mixed up in filing their taxes. The alterations that have been made in the rules have granted the chance for workers in the sectors of restaurants, hospitality, retail, and healthcare, as well as those on hourly salaries, to easily claim deductions that had been overlooked in the past.
Proper documentation and consultation with a trustworthy tax preparer assure that one can file with ease and less anxiety during the tax season. Clear guidance, simple planning, and the right professional support can help you to not only receive the full amount of your earnings but also remain completely compliant with the IRS’s regulations.
Connect with our experts at The Fino Partners to stay updated with the latest IRS regulations.
