No Tax on Tips and No Tax on Overtime: The New 2025 Deductions
Part of our 2025 Tax Law Changes guide — the complete breakdown of the One Big Beautiful Bill Act.
Two of the most publicized provisions of the 2025 One Big Beautiful Bill Act are the deductions often marketed as “no tax on tips” and “no tax on overtime.” Both are real, but the shorthand oversells them. They are deductions, not full exclusions, and each comes with caps, income phase-outs, and a scheduled expiration a few years out.
The tip deduction
Qualifying employees and certain self-employed workers in traditionally tipped occupations can deduct a limited amount of reported tip income. The deduction is capped, phases out above certain income levels, and requires that the tips be properly reported. Payroll and 1099 reporting were updated so that qualified tips can be identified.
The overtime deduction
Workers who receive overtime required under the Fair Labor Standards Act can deduct the premium portion of that pay — generally the “half” in time-and-a-half, not the entire overtime paycheck — up to a capped amount, again with income phase-outs.
Key limits to explain to clients
- Both deductions are temporary, currently scheduled to sunset after 2028.
- Both phase out as income rises.
- Payroll withholding does not automatically change — some workers will see the benefit only at filing.
- Employer reporting matters; accurate W-2 and 1099 coding is essential.
For preparers, the practical work is documentation: making sure tips and overtime premiums are separately identifiable so clients can actually claim what they are entitled to.
This article is educational and current as of its publication date. Federal tax provisions — including dollar thresholds, phase-outs, and effective dates — change frequently and many items described here are temporary. Confirm the current statute, IRS guidance, and your client’s facts before relying on any point below. This is not legal or tax advice.
