No Taxes on Tips and Overtime Explained
No Tax on Tips and Overtime Policies stem from President Trump’s 2024 campaign promises and were enacted as part of the One Big Beautiful Bill Act (OBBBA). The provisions provide federal income tax deductions for certain tipped income and overtime pay, effective for tax years 2025 through 2028 (i.e., income earned in those years, claimed starting with 2025 tax returns filed in 2026). Importantly, these are not full tax exemptions, they are deductions (Exemptions would be a dollar for dollar reduction in taxes owed, while deductions are a reduction in your taxable income). Additional information on no Tax on Tips and Overtime
They only apply to federal income taxes.
Payroll taxes (Social Security and Medicare, totaling 7.65% for employees) still apply fully.
State and local income taxes may still apply, depending on your state (some states have conformed to the federal changes, while others have not, meaning you could owe state taxes on these amounts).
Both are above-the-line deductions (claimed on Schedule 1-A), available whether you itemize or take the standard deduction.
The Formal IRS Guidance on No Tax on Tips and Overtime is here
No Tax on Tips
What it covers: Qualified tips received in occupations that “customarily and regularly” received tips as of December 31, 2024. The IRS published a list of eligible occupations (e.g., servers, bartenders, delivery drivers, hair stylists) by October 2025.
Maximum deduction: Up to $25,000 per year.
Eligibility:
Tips must be voluntary (from customers) and typically reported (cash or charged).
Limited to traditional tipped jobs to prevent abuse (e.g., no reclassifying high-salary income as tips).
Phase-out: Starts reducing for modified adjusted gross income (MAGI) over $150,000 (single) or $300,000 (married filing jointly).
Who benefits most: Tipped workers in service industries with moderate incomes. Low-income workers already owing little/no federal income tax may see limited benefit.
2025 specifics: Employers aren’t required to separately report tips on W-2s/1099s this year (transition relief). Workers can use reasonable methods to calculate eligible amounts. Employees/Tax Preparers are recommended to use Box 7 of the employees Form W-2 in determining eligibility for the tip deductions (Box 7 is the total amount of Social Security Tips).
No Tax on Overtime
What it covers: Only the premium portion of overtime pay (e.g., the extra “half” in time-and-a-half, as required by the Fair Labor Standards Act for non-exempt workers). Not the full overtime amount or base pay.
Maximum deduction: Up to $12,500 (single) or $25,000 (married filing jointly).
Eligibility:
Applies to hourly/non-exempt employees entitled to overtime under federal law.
Does not cover exempt salaried workers, contractors (in most cases), or non-FLSA overtime.
Phase-out: Same as tips—reduces for MAGI over $150,000 (single) or $300,000 (joint).
Who benefits most: Blue-collar, factory, or service workers who regularly earn overtime premiums.
2025 specifics: Similar transition relief—no separate reporting required on employer side this year (W-2). Employees and Tax Preparers are recommended to use Box 14 of the form W-2. This is where most employers will be reporting the qualified overtime amounts.
Limitations and Notes
These are temporary (expire after 2028 unless extended by Congress).
Employers continue normal withholding in 2025 (no changes to paychecks yet); the benefit comes as a larger refund or lower tax bill when filing.
Starting in 2026, withholding tables may adjust for some workers.
The IRS has issued guidance (e.g., Notice 2025-69) for calculating amounts in 2025, with penalty relief for reporting.
Example of the Schedule 1-A 2025 Draft:
The IRS introduced a new draft Schedule 1-A (Form 1040) in September 2025 to claim these (and other OBBBA) deductions. It consolidates:
Part for qualified tips (up to $25,000).
Part for qualified overtime premium (up to $12,500/$25,000).
Parts for other temporary deductions (e.g., car loan interest, enhanced senior deduction).
How it works:
Attach Schedule 1-A to your Form 1040.
Calculate your eligible amounts (considering phase-outs and MAGI).
The total from Schedule 1-A flows to Form 1040 as an additional above-the-line deduction.
For 2025: Since no separate W-2/1099 boxes, enter amounts based on records/pay stubs. IRS provides penalty relief and reasonable calculation methods.
There have been changes to withholding tables or paychecks in 2025, meaning benefit comes via larger refund/lower tax owed when filing. Individuals who receive tips and overtime will likely be receiving a larger refund this year.
