No Federal Tax on Tips and Overtime: What You Need to Know

For a small segment of the U.S. labor market, tips and overtime make up a big part of workers' total income. About 2.5% of workers—including servers, bartenders, and hairdressers—have jobs where tips are common. And about 8% of workers regularly work overtime.

If you're one of those workers, you're used to having to pay taxes on your tips and overtime. But under a new federal law passed in July 2025, known as the One Big Beautiful Bill Act (OBBBA), you'll be able to claim deductions on some of that money when you file your taxes—at least, for a few years.

Limitations on Tax Deductions in OBBBA

While the new law result in tax savings for many workers, others will still owe some amount of tax on their tips and overtime. For one thing, there are limits on how much you can claim in deductions. If you make more than the limit in tips or overtime, you'll still have to pay taxes on that income.

Plus, not all jobs are eligible, and the deductions are temporary: They go into effect retroactively as of January 2025 and are set to expire at the end of 2028.

Finally, the new law applies only to federal income taxes. It doesn't make any changes to state or local income taxes, and it doesn't affect payroll taxes like Social Security and Medicare.

Here's what else you need to know about the new deductions for tips and overtime.

Rules on Tax Deductions for Tips

Under the new law, eligible employees can deduct up to $25,000 in qualified tip income from their total taxable income. If you make more than that limit in tips, it will be taxed regularly and won't be subject to deduction.

You're eligible for a deduction if you work in a job that "customarily and regularly" receives tips. This is not determined by you or your employer, but by the federal government. The Treasury Department is expected to release a list of qualifying jobs in October 2025.

Many types of jobs are excluded from eligibility for a tip deduction. You aren't eligible for a deduction if you work in any of the following fields: accounting, health, law, actuarial science, athletics, brokerage services, consulting, financial services, performing arts, investing and investment management, or dealing in securities or commodities.

The deduction applies only to voluntary tips that are paid in cash, charged, or part of a tip-sharing arrangement. Mandatory service charges are not covered.

Your employer will be required to report the total amount of your qualifying tips on your W-2 forms. You don't need to itemize your tips to receive a deduction.

Phase Out for Higher Earners

The deduction phases out for higher income earners. If you make more than $150,000 a year ($300,000 for joint filers), the deduction is reduced by $100 for every $1,000 you make over that threshold.

Rules on Tax Deductions for Overtime

If you're eligible for an overtime deduction, you can deduct up to $12,500 in overtime income for single filers and $25,000 for joint filers.

Generally speaking, you're eligible if you work more than 40 hours a week in a job that's not considered executive, administrative, or professional under federal law (although there are some other exceptions).

The overtime deduction doesn't apply to all of your overtime pay. It only applies to the amount you make in excess of your normal pay rate. In other words, you can deduct the difference between your overtime wage and your normal wage.

For example, if you normally make $20 an hour, but you make $30 an hour in overtime pay, you can only claim a deduction for the extra $10 you make by working overtime. If you work 100 hours of overtime in a year, you can deduct $1,000 from your total taxable income.

If you receive any extra overtime pay under state law or a collective bargaining agreement, that pay is not eligible for the federal deduction.

Phase Out for Higher Earners

As with tip deductions, overtime deductions phase out for employees who make more than $150,000 a year, and your employer is required to report the total amount of your qualified overtime pay on your W-2 forms.