Let's start with overtime. The Qualified Overtime Deduction: Section 225 allows you to deduct qualified overtime compensation, subject to a few important limits:
- The deduction is capped at $12,500 per return ($25,000 for joint filers).
- It phases out based on modified adjusted gross income (MAGI):
- Phaseout begins at $150,000 for single filers
- $300,000 for joint filers
Who qualifies? To qualify for the overtime deduction, the overtime must be paid to someone who is:
- Covered by the Fair Labor Standards Act (FLSA), and
- Not exempt from FLSA overtime rules (in other words, an FLSA-eligible employee).
This matters more than many people realize.
Some employees who are not FLSA-eligible still receive premium pay under state law or employer policy (for example, double time on weekends). That pay does not count for this deduction. If you’re FLSA-ineligible, the overtime deduction is off the table—regardless of how your employer labels the pay.
If you’re unsure, ask HR or your employer directly whether you are considered FLSA-eligible.
2025—here’s where things get messy. For the 2025 tax year, employers are not required to separately report qualified overtime compensation on Form W-2 (for example, in Box 14). They can do it, but they don’t have to. That reporting requirement applies to later years.
That means you are responsible for making a reasonable determination of:
- Whether you are FLSA-eligible, and
- How much of your overtime pay actually qualifies for the deduction.
If your employer doesn’t break this out clearly, you’ll need to rely on payroll records and do some math.
Overtime examples:
Example 1: Clearly Reported Overtime Premium
You log into your payroll portal and see $5,000 labeled as “FLSA Overtime Premium” for the year. You can deduct the full $5,000.
Example 2: Total Overtime Paid at 1.5×
Your payroll portal shows “Total Overtime” of $15,000, which includes both your regular pay (1×) and the overtime premium (0.5×).
Only the extra 0.5× portion qualifies. Divide by 3, and your deductible overtime is $5,000.
Example 3: Paid at 2× Rate
Your payroll portal shows $20,000 of total overtime, and your employer pays double time (2×) instead of time-and-a-half.
In this case, divide by 4 again, which yields $5,000 of qualified overtime.
The overtime deduction is not for the full 1.5× (or 2×) amount. It applies only to the premium portion above your regular pay—typically the 0.5× in a standard overtime arrangement.
That’s why the math matters.
Next up: the Qualified Tips Deduction. Section 224 allows you to deduct qualified tips received during the year, as long as they are:
- Included on a Form W-2 or
- Reported on Form 4137
There are limits and phaseouts:
- The deduction is capped at $25,000 per year
- It phases out when MAGI exceeds:
- $150,000 (single)
- $300,000 (joint filers)
For most people, MAGI = AGI, unless you have foreign income exclusions under Sections 911, 931, or 933.
What counts as “Qualified Tips”? The law defines qualified tips as those received in an occupation that customarily and regularly receives tips on or before December 31, 2024. The Treasury has published a list of qualifying occupations (starting on page 18 of the guidance).
And no—this doesn’t mean you can suddenly call your professional fees “tips.” Sorry, that $1,000 someone adds for a tax return doesn’t count.
Tips must also be:
- Voluntary, and
- Paid without penalty or consequence if the customer chooses not to tip.
Tip examples:
Example 1: W-2 Tips Only:
You’re a server. Your Form W-2, Box 7, shows $20,000 of Social Security tips, and you didn’t report additional tips on Form 4137. Your qualified tips total $20,000.
Example 2: W-2 Tips + Form 4137:
Your W-2 shows $15,000 of tips, and you reported $4,000 of additional tips on Form 4137. Your qualified tips total $19,000.
Example 3: Self-Employed with Tip Records:
You’re a self-employed travel guide. You received $5,000 in tips, and a Form 1099-K shows $50,000 of total payments (without separating tips).
You maintain a daily log showing dates, amounts, and customers. You can use $5,000 in qualified tips, but you must keep your records.
Some final (and very important) advice: For both overtime and tip deductions, documentation is required. Keep:
- Forms W-2
- Payroll statements
- Tip logs
- Form 4137
- Any employer documentation supporting your calculations
If the IRS asks how you arrived at these numbers, you’ll want proof.
The good news: 2026 should be much simpler, especially for overtime, since employers will be required to report OBBBA-related amounts directly on Form W-2.
Until then, be careful, be conservative, and keep good records.
If you’ve got questions—or want help thinking through your own situation—feel free to reach out.