Business
Tax Tips – Understanding the New “No Tax on Overtime” and “No Tax on Tips” Policies
Table of Contents
Key Changes in Tax Rules for Overtime Pay and Tips – Tax Tips
The One Big Beautiful Bill Act (OBBBA) has introduced significant tax reforms, fulfilling two of President Trump’s key campaign promises: no tax on overtime and no tax on tips. These changes impact both employees and business owners, offering new deductions that could lead to substantial savings.
Thank you for reading this post, don't forget to subscribe!
If you’re wondering how these tax changes affect you—whether as a worker earning overtime or tips, or as an employer managing payroll—this guide breaks down everything you need to know.
No Tax on Overtime: What You Need to Know -Tax Tips
1. Deduction Details
- Retroactive to January 2025, the OBBBA allows employees to claim an above-the-line tax deduction on qualified overtime pay.
- Single filers can deduct up to $12,500, while joint filers can deduct up to $25,000.
- The deduction phases out for individuals earning over $150,000 (or $300,000 for joint filers).
- No itemization required—this deduction is available even if you take the standard deduction.
2. What Qualifies as Tax-Free Overtime?
- Only overtime wages exceeding the normal pay rate are eligible.
- Example: If your regular wage is $20/hour and overtime is $30/hour, you can deduct the extra $10/hour.
- Overtime must be paid under Section 7 of the Fair Labor Standards Act (FLSA)—meaning it applies only to employees working more than 40 hours per week.
- Overtime paid under contractual agreements or state laws only qualifies if it meets FLSA standards.
3. Payroll and Reporting Requirements
- Employers must track and report qualified overtime wages separately on Form W-2.
- A transition rule for 2025 allows employers to estimate overtime wages using a “reasonable method” until the IRS provides further guidance.
- Important Note: Overtime pay is still subject to payroll taxes (Social Security and Medicare).
4. Temporary Benefit
This deduction is only available until 2028, so employees should maximize savings while it lasts.
No Tax on Tips: How It Works
1. Deduction Overview
- Retroactive to 2025, tipped workers can claim an above-the-line deduction of up to $25,000.
- The deduction phases out for those earning over $150,000 (or $300,000 for joint filers).
- Like the overtime deduction, no itemization is required.
2. Who Qualifies?
- Workers in occupations that customarily receive tips (e.g., servers, bartenders, home service professionals).
- The Treasury Department will publish a list of qualifying jobs by early October 2024.
- Tips must be voluntary—mandatory service charges don’t count.
3. Exclusions to Be Aware Of
Employees in Specified Service Trades or Businesses (SSTBs) cannot claim this deduction. SSTBs include:
- Accounting, law, healthcare, consulting
- Financial services, brokerage, performing arts
- Businesses where the primary asset is the reputation or skill of the owner/employee
4. Reporting Tips Correctly
- Tips must be reported on Form W-2.
- A transition rule allows flexibility in reporting for 2025.
- Note: Tips are still subject to payroll taxes (Social Security and Medicare).
5. Temporary Benefit
This deduction also expires after 2028, so workers should take advantage while it’s available.
How Employers Should Prepare
1. For Overtime Pay
- Work with payroll providers or accountants to ensure proper tracking of eligible overtime.
- Update payroll systems to separately report qualified overtime wages on W-2 forms.
2. For Tipped Employees
- Identify which employees regularly receive tips.
- Ensure tips are voluntary (not mandatory service charges).
- Monitor IRS updates for the official list of qualifying occupations.
Key Takeaways for Workers and Businesses
✅ Overtime Deduction: Up to $12,500 (single) / $25,000 (joint) for eligible overtime pay.
✅ Tips Deduction: Up to $25,000 for workers in tip-heavy industries.
⚠️ Income Limits: Deductions phase out above $150,000 (single) / $300,000 (joint).
⚠️ Temporary Benefit: Both deductions expire after 2028.
📌 Payroll Taxes Still Apply: Overtime and tips remain subject to Social Security & Medicare taxes.
Final Thoughts: Maximizing Your Tax Savings
These new tax rules provide valuable savings opportunities for workers earning overtime or tips. However, the deductions are time-limited, so it’s crucial to:
- Track eligible overtime hours carefully.
- Report tips accurately to avoid IRS issues.
- Consult a tax professional to ensure compliance and maximize benefits.
For business owners, staying updated on IRS guidance and adjusting payroll systems will be key to smooth implementation.
Need Help with Tax Tips? Consult a Professional!
This article provides general information—always consult a tax advisor or accountant for personalized advice based on your financial situation.
By understanding these new policies, you can keep more of your hard-earned money and avoid surprises at tax time. Stay informed and plan ahead!