IRS issues guidance on ‘no tax on tips’ and overtime ahead of tax season as experts predict ‘off the charts’ confusion

According to the legislation, workers can only deduct tips and overtime if their earnings are reported through information returns like Forms W-2 or 1099. And while the IRS is encouraging employers across the country to provide this reporting, employers are not required to do so for the 2025 tax year. In fact, the IRS says employers will not be penalized for failing to provide correct payee statements to employees, or failing to file correct information returns (4).

“We’re going to have this hodgepodge, weird year of rules that’s going to make reporting very difficult for employees,” said Thomas Gorczynski, an enrolled agent based in Arizona.

With all of this in mind, some workers could mistakenly assume that all of their tips can be deducted from their income, while others may not realize they qualify for a deduction at all. It’s on the workers themselves to understand if they qualify, figure out the deduction and claim it correctly.

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Who qualifies for no tax on tips

The United States Department of the Treasury’s new “Tipped Occupation Code” system provides descriptions — as well as a three-digit code — for the occupations that are eligible for no tax on tips (5). The list is divided into eight buckets that heavily favor the service industry:

100s: Beverage & food service
200s: Entertainment & events
300s: Hospitality & guest services
400s: Home services
500s: Personal services
600s: Personal appearance & wellness
700s: Recreation & instruction
800s: Transportation & delivery

If you’re not sure whether your job falls under one of the listed occupations, be sure to check, as you’ll likely want to take advantage of this tax deduction on tips, if you qualify.

How to avoid confusion with your taxes

The IRS has acknowledged that most American employers lack the necessary systems to report all of the new tips and overtime details on W-2s and other forms for the 2025 tax year. With this in mind, here’s what workers looking to bank on Trump’s provisions can do to clear up any confusion with their taxes.

1. Make sure your occupation falls under the qualifications for no tax on tips. For those seeking deductions for their overtime work, make sure that your overtime meets federal labor standards, and confirm that you are in fact a non-exempt W-2 employee.

2. If you qualify, keep track of all of your tips and overtime records, including W-2s and 1099s.

3. Calculate your deduction amount for the year, and don’t forget about the caps on both tips and overtime deductions that were mentioned above.

Unfortunately, Trump’s no tax on tips and no tax on overtime provisions may not live up to what Americans were expecting. These are temporary, targeted deductions that were designed for specific workers, and only if they meet certain criteria.

But for those who qualify, the savings can be significant, and failing to understand the rules could lead to missed deductions or tax-season headaches. When in doubt, double-check your occupation, run the numbers, and don’t wait until the 2026 tax season to figure this all out. If you need help with putting all of this together, you can always consult with a tax professional.