If you’re like most Americans working in tips or overtime, you’re probably wondering if you’ll actually see more money in your pocket with this. The short answer: yes, if you qualify. These new deductions can reduce your federal income tax bill by hundreds or even thousands of dollars.
Are you an employer wondering how these changes affect your business?
H R. 1, or the One Big Beautiful Bill Act (OBBB), creates two significant tax breaks for workers starting with the 2025 tax year. If you earn tips or work overtime, you may be able to reduce your federal income tax through new deductions for qualified tips (up to $25,000) and overtime premium pay. For restaurant workers, hospitality employees, delivery drivers, and other service industry professionals, understanding these changes now helps you maximize your tax savings. Here’s what REDW’s tax experts want you to know.
Understanding the New Deductions
On November 21, 2025, the IRS released Notice 2025-69 providing guidance for two new federal tax deductions created by the One Big Beautiful Bill Act, signed into law in July 4, 2025: the “No Tax on Tips” deduction and the “No Tax on Overtime” deduction. More details are expected in early 2026, but here’s what you need to know now.
Who Can Claim These Deductions?
Both deductions are available on your personal income tax return, whether you itemize your deductions or take the standard deduction. They apply only to federal income tax – not to Social Security or Medicare taxes.
No Tax on Tips Deduction
If you regularly receive tips as part of your job, you may be able to deduct up to $25,000 of qualified tips from your taxable income. Employees can claim this deduction on their 2025 tax returns.
Eligibility
Income Limits: The deduction phases out if your modified adjusted gross income (MAGI) is more than $150,000 ($300,000 for married couples filing jointly).
Self-Employed Individuals: You can deduct up to the net income you earned from the business that generated your tips (not including this new deduction).
What Counts as a “Qualified Tip”?
Tips you received directly from customers or through a tip pool, paid in cash, check, gift card, or credit card, count as “qualified tips.”
Important note: Service charges and automatic gratuities added to bills don’t count as tips for this deduction.
Occupational Limits
The IRS specified that only certain types of jobs qualify, mainly in:
- Food and beverage service (servers, bartenders, bussers)
- Entertainment (casino dealers, valets)
- Hospitality (hotel staff, bellhops, concierges)
- Personal services (hairstylists, nail technicians, massage therapists)
- Transportation and delivery (rideshare drivers, food delivery drivers)
Not eligible?
If you work in accounting, law, healthcare, consulting, performing arts, or financial services, unfortunately this deduction doesn’t apply to your tips—even if you regularly receive them.
Reporting Requirements
Tips must be properly reported to the IRS using forms like W-2, 1099, or 4137. Employers must provide statements to employees showing total cash tips received and the recipient’s occupation.
No Tax on Overtime Deduction
Starting in 2025, the law allows certain employees to deduct the “premium” portion of their overtime pay from taxable income.
What Is “Qualified Overtime”?
Overtime pay is what is legally required under the Fair Labor Standards Act (FLSA), which establishes overtime rules for most U.S. workers. For most, this is time-and-a-half for hours worked over 40 per week.
Only the extra amount paid for overtime is deductible. For example, if your regular pay is $10/hour, and overtime pay is $15/hour, only the additional $5/hour is deductible.
Important Notes:
- Only applies to employees covered by the FLSA (generally, non-exempt workers).
- Overtime pay required only by state law, union agreements, or paid voluntarily by your employer (or tips) does not qualify.
Reporting Requirements
Employers must report the total qualified overtime paid for the year to the IRS and give employees a year-end statement.
What’s Next?
If you think you may qualify for these new deductions, keep all relevant records on hand—such as tip totals and overtime pay statements. Additional IRS guidance is expected soon, especially on the overtime deduction.
