What Do I Provide My Employees Asking for a Tips or Overtime Wages Report for 2025?
In this article:
Background
Because the One, Big, Beautiful Bill (OB3) went into effect mid-2025, the IRS will not penalize employers for failing to provide a formal report of tipped wages or overtime wages for 2025. In addition, there is no special reporting on the 2025 W-2s.
Still, the IRS encourages employers to help employees who would like to take advantage of the tax deduction when they file their 2025 return. What do you do?
Employers who want to avoid any liability from litigious employees for mistakes in 2025 reporting may choose not to provide employees with any tips or overtime information. Employees & tax preparers with questions about tips or overtime should be directed to the IRS guidance and 1040 instructions.
Patriot has created some general advice for employees on how to find their amount of qualified overtime and qualified tips. For employers who still want to help, read on about how you can find the numbers necessary for employees trying to claim an OB3 tax deduction for tips or overtime.
Find Tipped Wages for Employees
Tips should already be paid as separate money types in Patriot, and should appear in Box 7 of the employee’s W-2. For 2026, Patriot will need you to add Treasury Tipped Occupation Codes (TTOC) as defined by the IRS to tipped employees. Note that only voluntary tips are deductible. Automatic gratuities (such as an 18% service charge) are not tax-deductible.
For 2025, the IRS has provided Guidance for Individual Taxpayers with the following “reasonable methods” for determining qualified tips:
- Use the amount reported in Box 7 of Form W-2 (Social Security Tips)
and - Use the amount of tips the employee has reported on line 4 of Form 4137
We’ve created a help article you can share with employees, “How to Find Tip Totals for the “No Tax on Tips” Deduction.”
Find Overtime Wages for Employees
Overtime wages paid in 2025 will be more tricky, as the employee can only deduct the “and-a-half” premium of the overtime rate for hours worked over 40 in a workweek. For example, if their regular rate of pay is $10/hour, their overtime rate of 1.5x is $15/hour. Only the 0.5x, or the $5/hour is deductible. Let’s say the employee worked 40 regular hours and 3 overtime hours in a week.
In a paycheck, here’s how it would look:
40 regular hours: $10 x 40 = $400
3 overtime hours: $15 x 3 = $45
Qualified overtime premium for this check: $5 x 3 = $15
All states follow the federal overtime rules under the Fair Labor Standards Act (FLSA), which require overtime pay for any hours worked over 40 in a workweek at a rate not less than time and-a-half. However in addition to the federal rule, Alaska, California, Colorado, and Nevada have daily overtime requirements. Keep in mind, only the “and-a-half” of FLSA defined overtime is qualifying overtime for the tax deduction.
Because the 2025 W-2s do not show qualified overtime separately, employees will need to access their year-to-date payroll information for the entire year to determine the amount. According to the IRS Notice Guidance for Individual Taxpayers, if the employee only has access to their total overtime wages for the year, the IRS recommends using one-third of that total as qualified overtime premium for 2025.
Your employees can access their total overtime wages themselves in their My Patriot portal. We’ve created a help article you can share with employees,” How to Find Your “No Tax on Overtime” Deduction Amount.” Also, see the help article Employee Portal Registration Access for instructions on how to invite your employees to register for their portal, if needed.
If your employees do not have access to their My Patriot portal or hard copies of their pay stubs you can get information from:
1. Payroll Register- the last pay stub of the year will have all year to-date totals provided.
- Go to Reports > Payroll > Payroll Register.
- Select the date of the last pay date of 2025 for the employee.
- Click “Run Report”
- Click the View/Print Pay Stub link to download for the employee.
2. Payroll Details Report
- In your Patriot account, go to Reports > Payroll Reports > Payroll Details.
- Enter 1/1/2025 for the Start Date and 12/31/2025 for the End Date. You can filter by Locations, if needed.
- Include the employees you want to report on, keep all Sources selected, and Group By Employee. This will give a sum total of the entire year for each employee.
- Under the Earnings section, any employee with overtime wages will show their total for the year. Make note of this total.
- Take this number and divide by 3. This is the estimated amount of qualified overtime compensation for 2025. The deductible amount is subject to limits based on the employee’s filing status and adjusted gross income.
- You can download this report in spreadsheet format, which will make it easier to apply a formula to divide the overtime by 3.
Reporting for 2026
Reporting will be required on W-2s but less manual in 2026, as we make updates to our payroll system to track both qualified tips and overtime wages. Qualified tips and overtime will be reported on 2026 W-2s.
Check out our help articles for more info:
How to Add Tipped Occupation Codes to Employees
How to Add FLSA Overtime for W-2 Reporting
Disclaimer: The information in this article is not intended as tax or legal advice.
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