The One Big Beautiful Bill has introduced a major win for many U.S. workers, beginning in 2025, certain tips and overtime pay can be deducted from your federal taxable income. This change, in effect through 2028, could put thousands of extra dollars back in your pocket if you qualify.
Here’s what you need to know.
The Tip Deduction
Under the new law, eligible workers can deduct up to $25,000 per year in qualified tips. This includes:
- Cash tips received directly from customers
- Charged tips from credit card payments
- Tips received through tip pooling or sharing
The catch? All tips must be properly reported on a W-2, 1099, or Form 4137.
Who Qualifies
You must work in an occupation the IRS considers as “customarily and regularly receiving tips” as of December 31, 2024. The IRS will publish this list by October 2, 2025, so we’ll have to wait for the official word.
The deduction is available whether you itemize or take the standard deduction, but it begins to phase out for:
- Individuals with Modified Adjusted Gross Income (MAGI) over $150,000
- Married couples filing jointly with MAGI over $300,000
You’ll also need to include your Social Security Number on your return and file jointly if you’re married.
The Overtime Deduction
Overtime pay also gets a tax break, but with a few limits. If you earn federally required overtime under the Fair Labor Standards Act, you can deduct the portion of pay that exceeds your regular hourly rate (typically the extra ½-time premium).
Example:
If your regular rate is $10/hour and overtime is $15/hour, only the extra $5/hour is deductible.
Annual deduction caps are:
- $12,500 for individuals
- $25,000 for joint filers
Just like the tip deduction, overtime benefits phase out at the same income thresholds.
Important: Only overtime required under federal law qualifies. Overtime required by state law, union contracts, or holiday/shift differentials does not count.
Who’s Excluded
Not every self-employed worker is eligible. The law excludes those in a Specified Service Trade or Business (SSTB) as defined under Section 199A of the tax code, generally professions where income is tied to your skill or reputation.
This includes:
- Health care professionals
- Lawyers
- Consultants
- Accountants and financial advisors
- Performing artists and athletes
If you fall into one of these categories, even if you receive tips, you likely cannot claim this deduction.
Employer Reporting Requirements
The bill also changes what employers must report on W-2s. Employers will need to:
- Report the amount of qualified overtime compensation
- Identify cash tips and the employee’s occupation
For 2025 only, employers can estimate these amounts using a reasonable IRS-approved method.
These deductions affect income tax only—they do not change how wages are reported for Social Security, Medicare, or most 401(k) plans.
The Bottom Line
This new tax provision could be a game-changer for servers, bartenders, hospitality staff, and other tip-receiving workers, as well as hourly employees earning significant overtime. But eligibility rules are specific, and the IRS will release more guidance in the months ahead.
We’ll keep you updated when the official list of qualifying occupations is released in October 2025. In the meantime, track your tips and overtime carefully so you’re ready to maximize this benefit when filing your 2025 taxes.
