Tax Changes: Tips and Overtime Pay

On July 4th, President Trump signed a major new tax law: the One Big Beautiful Bill Act (OBBBA). The new legislation builds upon the 2017 Tax Cuts and Jobs Act (TCJA) and brings several changes to the tax code.

Tips and Overtime

How will this impact your taxes? In this article, we will review the changes that impact income earned through tips and overtime. But first, what is a tax deduction?  Check out this article on Tax Credits vs. Tax Deductions for a quick overview.

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No Tax on Tips (with limitations)

If you earn income from tips, you may be eligible for a brand-new deduction:

• Deduct up to $25,000 in reported tips from taxable income

• The tips must be reported on IRS-approved forms, such as Form 4137, or employer-furnished wage statements (e.g., Forms W-2, Form 1099-NEC, Form 1099-K, etc.)

• The deduction phases out if the taxpayer’s MAGI exceeds $150,000 for individuals or $300,000 for joint filers

• This deduction is available for tax years 2025 through 2028

Definition of qualified tips

Tips include cash, card-based payments and amounts distributed through tip-sharing arrangements. To qualify as a tip, the payment must be made voluntarily by the customer, not subject to negotiation and determined solely at the customer’s discretion. However, tips received in a specified service trade or business (SSTB) as defined under §199A are excluded.

✅ Bottom Line: If your job includes cash or card-based tips, this could mean real tax savings—as long as you keep good records.

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No Tax on Overtime (also with limitations)

Starting with the 2025 tax year, employees who earn overtime may qualify for a brand-new deduction that could significantly reduce their taxable income.

What’s New?

Under the new law, taxpayers can deduct eligible overtime pay from their income if:

• The compensation is properly reported on a W-2 or other IRS-accepted form

• The overtime qualifies under the Fair Labor Standards Act—meaning it’s pay for hours worked beyond 40 in a week, at a rate above regular hourly wages

👉 Note: This deduction does not apply to tips, even if they’re earned during overtime hours.

Deduction Limits and Phaseouts

There are two main limitations on the deduction:

1. Maximum deduction amounts:

   • $12,500 for single filers

   • $25,000 for married couples filing jointly

2. Income-based phaseout:

   • If your modified adjusted gross income (MAGI) exceeds $150,000 (single) or $300,000 (married filing jointly), the deduction is reduced by $100 for every $1,000 over the threshold

Additional Requirements

• You must provide a valid Social Security number

• Married couples must file jointly to claim the deduction

• This deduction is available for tax years 2025 through 2028

Why It Matters

This new provision is designed to benefit workers who go above and beyond their normal schedules. For eligible employees, it provides a way to lower taxable income and potentially reduce their overall tax bill.