By: Robert Brody and Matthew Chiota
What is New?
On July 4th, 2025, President Donald Trump signed the “One Big Beautiful Bill Act” into law. One of the features of this bill is a federal income tax deduction related to tip and overtime income.
No Tax on Tips
The No Tax on Tips provision creates a new tax deduction of up to $25,000 on income garnered from cash tips. The provision will be phased out for individuals as they earn over $150,000 annually. For every $1,000 over that limit, the deduction will decrease by $100. This deduction is retroactive to January 1, 2025, tax year and ends on December 31, 2028. Tips will only be tax deductible if they are reported to employers and reflected on W-2 forms. Additionally, tips must be “voluntary.” This will disqualify tips that are built-in to checks as a “mandatory service tip.”
Who is Eligible?
Eligible employees are generally those who work in an occupation that “customarily and regularly received tips.” However, with the broad expansion of tipping culture in the United States, the U.S. Treasury Department released a preliminary list of occupations that will be eligible. The list contains 68 occupations and is subject to change. This list is much broader than what most restaurateurs would consider tipped employees. The IRS will publish a final list of qualifying occupations by October 2nd. Preliminary List of Eligible Occupations.
Employers will be required to report tip amounts on W-2 forms. Thus, employers should create a system to record all tips received in 2025. If a payroll company is being used, ask they what system they suggest for this purpose. The IRS has provided a draft for the 2026 W-2 form that includes this information. The form is only a draft, but it can provide employers with some clarity on how W-2 reporting may change. 2026 Form W-2.
No Tax on Overtime
The No Tax on Overtime provision creates a similar tax deduction for workers who are eligible to work overtime. The provision will retroactively take effect on January 1, 2025, and end on December 31, 2028. The deduction will only apply to the premium portion of overtime. Thus, when employees are paid time-and-a-half for their overtime hours worked, only the additional half-time pay will be deductible. The maximum deduction for individuals is $12,500 and $25,000 for those who are married filing jointly. Similar to the No Tax on Tips provision, individuals earning $150,000 or more will be phased out and those who are married filing jointly will phase out at $300,000. Like the No Tax on Tips provision, the phase out decreases the cap on the deduction by $100 for every $1,000 over that limit.
Employers will also be required to report overtime hours worked. Employers should create clear policies and procedures for reporting hours. This tax deduction makes overtime work more attractive for employees. It would be reasonable to assume employees will seek more overtime work, which will likely create a more motivated workforce. On the other hand, it may lead to opportunities for abuse. Employers should place policies and procedures in place to protect themselves from employees abusing overtime.
Who is Eligible?
The deduction applies to non-exempt workers under the FLSA. If you have any questions regarding the overtime exemption status of an employee under the FLSA, speak with an employment attorney for assistance.
Brody and Associates regularly advises management on compliance with the latest local, state and federal employment laws. If we can be of assistance in this area, please contact us at info@brodyandassociates.com or 203.454.0560.
