Initial IRS Guidance Released

On July 14, the IRS issued its first round of explanations (FS-2025-03) regarding the new deductions for tips, overtime pay, and auto loan interest. While more detailed rules are expected soon, these deductions are now in effect for the 2025 tax year. Although created for individual taxpayers, these provisions have direct implications for businesses. Employers will need to adjust reporting processes and prepare employees for how these new deductions may affect their tax filings.

Deduction for Tips

Eligibility for the new tip deduction will depend partly on how the business is classified. Employers must report employee tip income more extensively, and the deduction will only apply if:

• The employer is not considered a specified service trade or business under Section 199A.
• The employee works in an occupation that “customarily and regularly” received tips before 2025.
• The tips are voluntary, not mandatory gratuities.

The IRS has committed to publishing a list of qualifying occupations by October 2, 2025. Transition relief will be available for both workers claiming the deduction and employers adapting to the new reporting standards.

Deduction for Overtime Pay

The new overtime deduction also comes with employer reporting requirements. According to the IRS, this deduction applies only to the additional compensation portion of overtime pay—specifically, the “half” portion of “time-and-a-half” under the Fair Labor Standards Act. As with the tip deduction, transition relief will apply throughout 2025 to allow individuals and businesses time to comply.

Deduction for Auto Loan Interest

The IRS also clarified that certain auto loan interest may now be deductible. However, lenders must make eligibility determinations and provide new information reporting for taxpayers to claim this deduction.

Withholding Considerations

At this time, the IRS has not announced any changes to federal withholding tables or Form W-4 to account for the new deductions. Employers should maintain current withholding procedures unless further updates are released or employees file a new W-4.

What Employers Should Do Now

Businesses—especially hospitality employers where tipping is common—should not wait for final guidance before preparing. Important steps include:

• Determining whether the business qualifies as a specified trade or business under Section 199A.
• Reviewing tip policies, since mandatory gratuities could prevent employees from claiming deductions.
• Monitoring the IRS list of qualifying occupations once released.
• Communicating with employees about potential withholding impacts and upcoming changes.

Employers with tipped and overtime-eligible workers should start planning now to avoid compliance issues and help employees maximize available deductions.

Get Guidance from Local Tax Professionals

Understanding new IRS deductions can be complex, and the reporting requirements create additional responsibilities for businesses. Working with a trusted certified public accountant can help you navigate these changes confidently. If you’re searching for an experienced CPA near me or reliable accountants in Sarasota, Cavanaugh & Co. is here to help. Our team of Sarasota accountants has decades of experience guiding businesses and individuals through evolving tax laws, and we are recognized among top Sarasota CPA firms for client care and expertise. Contact Cavanaugh & Co. today to connect with our tax professionals and learn how these new deductions may impact you and your business.