Treasury to Clarify New Tip and Overtime Tax Deductions by October

As part of the recently passed federal tax package the so-called One Big Beautiful Bill millions of American workers are now eligible for significant new deductions on tip income and overtime pay. These changes aim to provide targeted relief to lower- and middle-income wage earners facing inflation and post-pandemic job volatility.

But key details remain unclear. The Treasury Department and Internal Revenue Service (IRS) are now on a deadline: October 2, 2025, to issue final guidance on how these deductions will work.

This blogpost breaks down what we know, what still needs clarification, and how tax professionals should prepare.

What the Law Says

Under the new statute:

• Tip Income Deduction: Workers who earn tipped wages (e.g., servers, bartenders, hair stylists) may deduct up to $25,000 in tip income from their federal taxable income annually.

• Overtime Pay Deduction: Employees who receive overtime pay (typically defined as time-and-a-half over 40 hours per week) may deduct up to $12,500 in overtime earnings annually.

• Effective Date: Both provisions apply to tax years 2025 through 2028.

What Needs Clarification

While the legislation outlines the deduction limits and timeframes, it delegates critical implementation details to Treasury and the IRS. Here are the most urgent open questions:

Category	Key Questions
Eligibility	Which occupations qualify as “tipped”? Are cash tips and credit card tips treated differently? What constitutes “overtime” for salaried vs. hourly workers?
Employer Role	Will employers need to separately report eligible tip and overtime income on Form W-2 or another form?
Documentation	What proof must taxpayers retain to substantiate their deduction—pay stubs, employer statements, or time logs?
Coordination	Will these deductions interact with the Earned Income Tax Credit (EITC) or state-level wage credits?

The IRS is expected to issue a Notice of Proposed Rulemaking (NPRM) in September, with final guidance published by the statutory deadline of October 2, 2025.

Who Benefits Most?

According to the Congressional Budget Office (CBO), the average taxpayer savings is estimated at:

Worker Type	Avg. Annual Tax Savings
Full-time tipped worker	$1,800 – $2,000
Manufacturing or warehouse worker with overtime	$1,400 – $1,750

More than 21 million workers could be eligible nationwide. For many in the service, logistics, and healthcare sectors, this deduction could create a noticeable reduction in federal tax liability.

What Tax Professionals Should Do Now

Until the Treasury finalizes the rules, tax professionals should begin preparing clients with:

• Preliminary Education: Alert clients in service and hourly labor industries that new deductions are coming.

• Record-Keeping Setup: Encourage employers and employees to maintain accurate documentation of tipped and overtime earnings for 2025.

• W-2 Review Planning: Work with payroll providers to track how these new amounts might be broken out on 2025 W-2s.

• Scenario Modeling: Use tools like Bizora AI to estimate impacts on taxable income and plan for refund changes.

  
  

How Bizora AI Helps

Bizora AI is already updating its tax engine to support these new provisions. Here’s how tax professionals can leverage it today:

• Generate custom deduction scenarios by inputting W-2 wage data and industry classification

• Draft client communications explaining what’s changing and how to prepare

• Stay current with real-time alerts when Treasury guidance is finalized

• Automate research memos for firmwide distribution or client reference

  
  

Final Thoughts

These new deductions represent a rare moment where tax relief is both meaningful and targeted toward working-class Americans. But with unclear boundaries and fast-moving rulemaking, proactive guidance will be critical.

Stay ahead of the curve with Bizora AI—your always-on tax research assistant.

Bookmark this blog for updates when Treasury guidance drops this fall.