Two of the most widely discussed provisions in the One Big Beautiful Bill Act (OBBBA) are the new tax deductions for overtime pay and tip income. While commonly referred to as “No Tax on Overtime” and “No Tax on Tips,” these provisions do not exempt income from payroll tax withholding, instead they provide temporary above-the-line deductions that can reduce taxable income when filing your return.
Here’s a breakdown of each provision:
No Tax on Overtime
Effective for tax years 2025 through 2028, individuals can deduct the premium portion of qualified overtime compensation. The premium portion refers to the pay that exceeds their regular rate of pay, such as the “half” piece of “time-and-a-half” pay per the Fair Labor Standards Act (FLSA).
Key Details:
- Deduction Limit: Up to $12,500 annually ($25,000 for married couples filing jointly)
- Available To: Both itemizing and non-itemizing taxpayers
- Income Phase-Out: Begins at $150,000 modified AGI ($300,000 for joint filers)
- Taxpayer Requirements:
- Must include Social Security Number on the return
- Must file jointly if married
- Still Subject To: Employment taxes (e.g., Social Security and Medicare), state and local taxes (pending any state-level updates)
- Reporting: Qualified overtime compensation must be reported on a W-2, 1099, or other specified statement
- Implementation Support: The IRS will provide transition relief in 2025 for both taxpayers and employers
No Tax on Tips
Also effective for tax years 2025 through 2028, a new deduction is available for employees and self-employed individuals who receive qualified tips in occupations that customarily and regularly receive tips. The IRS will be releasing a list of such occupations no later than October 2, 2025. Additionally, the IRS will provide transition relief for tax year 2025 for taxpayers claiming the deduction and for employers and payors subject to the new reporting requirements.
Key Details:
- Deduction Limit: Up to $25,000
- Eligible Tips: Voluntary cash or charged tips received from customers or through tip sharing
- Self-Employed Limit: Deduction cannot exceed the net income from the business in which the tips were earned
- Income Phase-Out: Begins at $150,000 modified AGI ($300,000 for joint filers)
- Taxpayer Requirements:
- Must include Social Security Number on the return
- Must file jointly if married
- Employer Requirements:
- Must report tip amounts and occupation to the IRS
- Availability: Applies to both itemizing and non-itemizing taxpayers
- Restrictions:
- Self-employed individuals in a Specified Service Trade or Business (SSTB) under section 199A are not eligible
- Employees of employers that are SSTBs are also not eligible
- Still Subject To: Employment taxes (e.g., Social Security and Medicare), state and local taxes (pending any state-level updates)
- Reporting: Tips must be reported on a W-2, 1099, or via Form 4137 if reported directly by the individual
What This Means for Taxpayers
These deductions offer potential tax savings for workers in industries where overtime and tip income are common. While they don’t affect how income is taxed during the year, they may help lower taxable income at filing time, making it crucial for taxpayers and employers to keep proper records and understand eligibility.
As with all new tax provisions, it’s important to monitor IRS guidance and consult with a qualified tax advisor to ensure compliance and maximize the benefit of these deductions.
For more details, check out: One Big Beautiful Bill Act: Tax deductions for working Americans and seniors.
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This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
