Getting Ready for Tax Season:
Your Guide to the New Tips & Overtime Deductions

Greetings!

If you've been hearing about the "no tax on tips" or "no tax on overtime" provisions in the news, you might be wondering what they actually mean for you. We wanted to break it down into something actually useful as you prepare for tax season.

The Big Picture

Starting with your 2025 taxes (the return you'll file in early 2026), you may be able to deduct:

• Up to $25,000 in tips you received this year
• Up to $12,500 ($25,000 for married couples filing jointly) in overtime pay

Both deductions phase out if your income exceeds $150,000 ($300,000 for couples), and you must file jointly if you're married—no separate filing allowed.

No Tax on Tips: Who Can Claim This?

You can deduct tips if you work in an occupation that "customarily and regularly received tips" as of December 31, 2024. This includes servers, bartenders, delivery drivers, hairstylists, taxi/rideshare drivers, valets, bellhops, and many others. You can be an employee OR self-employed.

What You Need to Do Now

If you're an employee:

Your tips need to be reported somewhere official—either on your W-2 or on Form 4137 (for unreported tips). Here's the practical reality for 2025: we'll need one of these to calculate tips:

1. Box 7 of your W-2 (Social Security tips)
2. Your Forms 4070 (the monthly tip reports you gave your employer throughout the year—keep these!)
3. Box 14 of your W-2 (if your employer voluntarily reports your cash tips there)

Action items:

• Gather all your monthly tip reports (Forms 4070) you submitted to your employer this year
• Keep your final 2025 pay stub—this is critical! Submit it with your other documents
• Check your W2 for "Social Security Tips" in box 7 in January.

If you're self-employed or a contractor:

This gets a bit trickier. Your tips might show up on a 1099-NEC, 1099-MISC, or 1099-K, but they likely won't be broken out separately. You'll need to document your tips using:

• Daily tip logs
• Earnings statements from platforms you work through
• Point-of-sale reports
• Third-party payment processor records
• Any other documentation showing what portion of your income came from tips

Action items:

• Start (or continue) keeping a detailed daily tip log
• Save all earnings statements from apps or platforms
• Submit tip documentation with your tax documents—this includes tip logs, platform earnings reports, receipts, and any other records showing your tip income
• IMPORTANT: If you use a point-of-sale system or credit card processor, make sure it's set up to track tips as a separate line item, not combined with your service fees. Tips need to show up distinctly in your records—not just as part of one total sale amount. If your system doesn't do this, adjust your settings now for future years.

No Tax on Overtime: Who Can Claim This?

This deduction is specifically for overtime pay required under federal law (the Fair Labor Standards Act). That means:

• You must have actually received overtime pay
• The overtime must be for hours over 40 in a workweek (generally)
• It only counts the extra "half" in the "time-and-a-half" rate (nothing extra for double-time pay).

Figuring Out Your Overtime Amount

This is where it gets a bit mathy but stick with us. What counts as "qualified overtime" is just the premium portion—the extra half of your pay rate that's above your regular wages.

The simplest case: Your employer reports your "overtime premium" separately on your pay stub or in box 14 of your W-2. Use that number.

If your pay stub shows total overtime but not the premium: Divide your total overtime amount by 3. (This works because if you're paid 1.5x your rate, one-third of that total is the premium.)

Example: Your pay stub shows $15,000 in total overtime for 2025. Your qualified overtime compensation is $5,000 ($15,000 ÷ 3).

If your employer pays double-time or another rate: The math changes slightly. For double-time, divide your overtime premium by 2 to get the qualified amount, or divide your total overtime by 4.

What You Need to Do Now

Action items:

• Check whether you're eligible for federal overtime (if you're unsure, this is worth confirming with your employer)
• Find your 2025 pay stubs or access to your payroll system
• Look for any line items labeled "overtime," "overtime premium," or "OT"
• Save your final 2025 pay stub and submit it with your tax documents—we need this to calculate your deduction accurately
• If your employer provides a year-end summary with your W-2, save that too

A Few Important Reminders

You must have a Social Security number. These deductions aren't available if you file with an ITIN.

Keep good records. The IRS is clear that you need to be able to substantiate your deduction. Keep all pay stubs, tip logs, Forms 4070, and any other documentation. When you come in for your appointment or send us your tax documents, please include your final 2025 pay stub if you received tips or overtime, and all tip documentation if you're self-employed.

This is brand new for everyone. The IRS is still figuring out the details, and so are we. If your situation feels complicated, that's normal—these rules are genuinely complex.

State taxes are separate. These are federal deductions only. Your state taxes may work differently.

What We're Doing to Help

We're closely monitoring IRS guidance as it develops and updating our tax prep process to handle these new deductions. When you come in for your appointment (or send us your documents), we'll help you:

• Determine if you're eligible for either deduction
• Make sure everything is properly documented
• Submit extra documentation with your tax forms this coming year

Questions to Think About Before Tax Season

• Do you work in a tipped occupation? Do you have records of your tips?
• Are you eligible for federal overtime? How is it shown on your pay stubs?
• Did you keep your monthly tip reports and pay stubs from 2025?
• Are you close to the income phase-out thresholds?
• Do you have your final 2025 pay stub ready to submit with your tax documents?

If you're not sure about any of these, that's exactly what we're here for. Reach out and we'll figure it out together.

What to Submit for Your Tax Appointment

If you received tips or overtime in 2025, please make sure to include:

For everyone:

• Your final 2025 pay stub (this often has year-to-date totals we need)
• All Forms W-2, 1099-NEC, 1099-MISC, and 1099-K

For tipped employees:

• Copies of Forms 4070 (monthly tip reports to your employer)
• Any tip documentation your employer provided

For self-employed individuals who received tips:

• Daily tip logs for the entire year
• All earnings statements from platforms or apps
• Point-of-sale reports if available
• Credit card processing reports showing tips separately from base charges
• Any other documentation showing tip income separate from regular income
• Note: Going forward, make sure your payment systems track tips as separate line items, not bundled into total sales

For overtime workers:

• Your final pay stub showing overtime totals
• Any year-end payroll summary your employer provides

Let's make this tax season as smooth as possible. If you have questions about how these new rules apply to your situation and want to do a year end tax estimate, please schedule a consult with your tax preparer.

Note: standard hourly consulting fees will apply to run estimates and discuss tax saving strategies.