No Tax on Tips and Overtime: What Workers Need to Know

The 2025 One Big Beautiful Bill Act introduced a landmark change for American workers: tips and overtime wages are now partially shielded from federal income tax through 2028. This law creates new deductions that directly reduce taxable income for those who rely on tipped or overtime pay, providing a measurable boost to take‑home earnings.

What the Law Does

Starting with the 2025 tax year, qualified tips and overtime pay can be deducted from federal taxable income. These are above‑the‑line deductions, meaning they reduce income before standard or itemized deductions are applied. The law targets two main categories:

Tips

• Workers in tipped occupations can deduct up to $25,000 in reported tip income.

• Cash and electronic tips qualify if properly documented.

• High earners face phased reductions: the deduction begins to phase out around $150,000 for single filers and $300,000 for joint filers.

• The deduction applies to federal income tax only; Social Security and Medicare taxes still apply.

Overtime

• The premium portion of overtime pay — the extra above the regular rate — can also be deducted.

• Single filers may deduct up to $12,500, joint filers up to $25,000.

• Only W‑2 employees are eligible; contractors are excluded.

• Payroll taxes still apply; the deduction only reduces federal income tax liability.

Filing and Reporting

Deductions apply when filing the 2025 federal tax return (filed in 2026). Employers and payroll systems have updated reporting requirements to track eligible tips and overtime. While withholding may not change immediately, accurate reporting ensures the deductions can be claimed on tax returns.

Real Impact for Workers

For hospitality, service, and hourly workers, these deductions mean more take‑home pay without increasing wages. Employees relying heavily on tips or overtime may see their taxable income decrease significantly.

Important considerations:

• The deduction reduces taxable income, not wages; reported income still counts for payroll taxes.

• State income tax rules vary; many states do not conform automatically to the federal deductions.

• The law expires after 2028 unless Congress extends it.

Limitations

Not all tipped jobs qualify. High earners may see reduced or no benefit, and non‑employee contractors are ineligible. Phaseouts and occupational restrictions determine who can fully take advantage of the law.

The Bigger Picture

No tax on tips and overtime represents a targeted federal tax cut for workers who often depend on variable income streams. Its success depends on compliance, employer reporting, and state adoption. For millions of Americans, it’s a concrete increase in take‑home pay that lasts through the end of the decade.