IRS Promises Employer Transition Relief for Tips and Overtime Deductions

The IRS on July 14 released initial explanations (FS-2025-03) of the new deductions for tips, overtime pay, and auto loan interest, while pledging to quickly release more substantial guidance.

The deductions are for individuals but have important implications for businesses. They are effective immediately for 2025. 

Tips Deduction

Eligibility for the tips deduction will depend partially on entity-level determinations, and employers will be required to perform new reporting on employee tip income. The deduction is available only if the employer is not in a specified service trade or business under Section 199A, and the employee’s occupation must have “customarily and regularly” received tips prior to 2025. In addition, the tips must be voluntary.

The IRS said it would publish a list of qualified occupations by Oct. 2, 2025, and would provide transition relief for both individuals claiming the deductions and employers subject to the new reporting requirements. 

Overtime Pay

The deduction for overtime pay will also require new reporting by employers, and is available for overtime as defined under the Fair Labor Standards Act. The IRS description confirmed that the deduction is only for the amount of additional compensation that exceeds the employee’s regular pay rate, “such as the ‘half’ portion of ‘time-and-a-half.’” The IRS said it would provide transition relief for individuals and employers for 2025.

Auto Loan Interest

For the auto loan interest deduction, the lender must make several determinations to establish that the interest qualifies, and perform new information reporting. 

The IRS release did not mention any potential updates to the withholding tables or Form W-4 to reflect the new deductions. Employers should generally maintain current withholding unless the IRS changes its withholding guidance or employees submit a new W-4.

Key Takeaway

Hospitality businesses should not wait for additional guidance to begin preparing to implement this provision. It will be important to determine whether the business is a specified trade or business under Section 199A, which would preclude employees from claiming a deduction. Tip policies will also be important. Any mandatory gratuities could also preclude a deduction for employees. IRS guidance on qualifying occupations should be forthcoming. Employers with employees who receive tips or overtime compensation can also consider communicating with employees on withholding considerations.  

Questions?

If you have questions, contact HFM today. Our professionals are well versed on the latest issues to provide our clients with professional, personalized services.

Written by Dustin Stamper. Copyright © 2025. BDO USA, P.C. All rights reserved. www.bdo.com