IRS Rules Allow More Workers to Snatch Overtime, Tips Breaks (1)

More workers will be eligible —at least for this year—for President Donald Trump’s “no tax on tips” and “no tax on overtime” deductions after the IRS offered some relief Friday.

The IRS is delaying implementation of provisions that restrict who could benefit from the breaks created in the GOP’s tax-and-spending law, it said in guidance. Generally, those earning tipped income can deduct up to $25,000 per year and employees earning overtime pay can deduct up to $12,500.

The law prevented workers in certain industries like health, law and consulting where workers are in a “specified service trade or business” from claiming the tips deduction. The IRS guidance punts that restriction from going into effect until after final rules are released as a way to give employees and employers more time to determine if they fall under that category.

“This is favorable for both employers and employees,” said Amber Salotto, a compensation and benefits tax managing director at RSM Washington National Tax. She added that there are a number of businesses that never had to figure out if they were a specified service trade or business.

The IRS also changed who can qualify for the overtime deduction for now. According to the law, the deduction is for overtime under federal employment law, excluding employees who are getting paid overtime because of a union contract or state law.

The new transition guidance is allowing the deduction for 2025 regardless if the overtime is due to federal employment law or another mechanism, said Dustin Stamper, managing director of tax legislative affairs at BDO USA.

“I think that’s certainly going to expand eligibility this year,” he said. “But I think it’s really helpful for taxpayers.”

The IRS guidance also tells workers how to calculate the new deductions.

Trump first proposed the breaks during his second campaign for president, and the idea caught fire with some workers and lawmakers in both parties on Capitol Hill.

Particularly with the tips deduction, economists and others say carving out the exception for one set of workers while not others in the same workplace is not good tax policy. Skeptics also say the breaks will be prone to abuse.

Workers got more clarity on how to determine the amount of their deduction without receiving separate accounting from their employer in Notice 2025-69. This guidance gives more relief to employees after the IRS said it wouldn’t penalize employers for not providing separate accounting in these cases for 2025.

Still, there will be no changes to the 2025 Form W-2, Form 1099-NEC, Form 1099-MISC, or Form 1099-K to account for the new reporting requirements in the new law, the IRS previously announced.

Choosing to not change these forms could lead to operational challenges for taxpayers and tax preparers, the National Association for Tax Professionals said.

“Without updated W-2 or 1099 reporting, taxpayers must rely on an array of alternative records such as Forms 4070, 4137, POS logs, earnings statements, etc., that many will not have maintained, which creates inconsistent reporting and risk of error,” said Tom O’Saben, the director of tax content and government relations at NATP in a statement.