By Ashlea Ebeling and Richard Rubin

The Internal Revenue Service signaled that it is relaxing enforcement of the new "no tax on tips" law, allowing more workers to potentially take advantage of the break.

The agency said Friday it is temporarily delaying implementation of a provision of the law that prevents workers in certain service businesses from claiming the deduction. That means some tipped workers can claim bigger deductions than the law technically allows and get larger refunds in next spring's tax-filing season.

The IRS earlier this year put out a list of dozens of jobs where tipped income would qualify for the deduction. But the law also has an important restriction. It says workers in a "specified service trade or business," or SSTB, including health, law, performing arts and athletics, can't claim the break.

The SSTB limit depends on the business of the employer, so a self-employed piano player might not qualify for the deduction while a piano player employed by a hotel would.

The new IRS guidance says the SSTB restriction won't be enforced until the first year after final regulations are released. That means it likely won't be in effect for tax year 2026 either. Many employers and workers don't know whether they fall in that SSTB category.

Congress included "no tax on tips" and "no tax on overtime" in the tax and spending law that President Trump signed July 4. The provisions took effect retroactively for 2025, so taxpayers can take advantage of the benefits when they file taxes next year. Taxpayers can claim the deductions whether they take the standard deduction or itemize deductions.

The full $25,000 income-tax deduction for tip income starts phasing out once income reaches $150,000 for individuals and $300,000 for married couples. The $25,000 maximum applies to individuals and married couples.

The overtime-pay deduction is capped at $12,500 for individuals and $25,000 for married couples. The break starts shrinking once income reaches $150,000 for individuals and $300,000 for married couples.

The retroactive tax cut will get money to workers faster, but it also poses unusual administrative challenges for the government, employers and employees.

The agency already told employers that they won't face penalties for failing to comply with all the reporting requirements in the new law. Friday's guidance is welcome news for taxpayers already wondering how they should report tips and overtime for tax year 2025, when they may not have all the required records or information from their employers.

For the overtime deduction, the formula for what counts as overtime is complicated. The guidance lets taxpayers calculate how much they can deduct based on their pay stubs, by backing out the "half" of the "time and a half."

But only overtime pay that is mandated under the Fair Labor Standards Act is eligible. That isn't something that employees always know. Workers in some industries, such as airlines and railroads, are covered by other federal labor laws.

Write to Ashlea Ebeling at ashlea.ebeling@wsj.com and Richard Rubin at richard.rubin@wsj.com

(END) Dow Jones Newswires

November 21, 2025 11:15 ET (16:15 GMT)

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