On Friday, July 5, 2025, the “One Big Beautiful Bill” Act (“OBBBA”) was officially signed into law, which includes provisions for exempting tips and overtime from taxes, effective through December 31, 2028. Under the new law, employees who customarily and regularly receive tips can deduct up to $25,000 in tips from their income, subject to federal income tax, starting January 1, 2025. Meanwhile, businesses must report these tips on Form W-2 for employees and on Form 1099 for nonemployees. The act also allows workers to deduct up to $12,500 in overtime pay from their income, subject to federal income tax. Businesses are required to report qualified overtime compensation on Form W-2 for employees and on Form 1099 for nonemployees.
Here’s How the Deductions Work:
No Tax on Tips
- Workers can now deduct up to $25,000 in tip income above the line on their federal return.
- Applies to tips that are voluntarily paid — not mandatory service charges.
- Available from tax years 2025 through 2028.
- Phases out for individuals earning more than $150,000 (or $300,000 for couples filing jointly).
No Tax on Overtime
- Deduction of up to $12,500 per individual, or $25,000 for couples filing jointly.
- Only applies to FLSA-defined overtime, not state-only or contractual overtime.
- Follows the same income and time limits as the tips provision.
Implementation of the new law is ongoing. The IRS and Treasury Department will now begin the process of writing the rules that guide:
- Which jobs and positions are eligible?
- How tips and OT must be reported.
- What counts as a qualified tip or overtime payment under the law?
Employers should be ready to adapt their payroll and reporting systems — and expect further clarification in the coming months. Employers navigating the new “no tax on tips” and “no tax on overtime” provisions of the OBBA are encouraged to consider all relevant factors in their decision-making process. For questions or a better understanding of the bill’s implications, please consult with Matt Stokely of Pickrel, Schaeffer & Ebeling at 937-223-1130 or mstokely@pselaw.com.
