This summer, a major change quietly reshaped the way millions of Americans will be taxed. On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBB) into law. Tucked inside the sweeping legislation is something many workers have been waiting years to hear: “No Tax on Tips and Overtime.”
For anyone who relies on tips or who often works extra hours, this new rule could mean a lighter tax bill and more money in your pocket. But as with most tax laws, the details matter.
What It Means for Tipped Workers
Think of a server finishing a long Saturday night shift, a bartender balancing late hours, or a stylist earning extra from grateful clients. For years, every dollar in tips had to be reported as taxable income. Now, under the new law, workers can exclude up to $25,000 in tips per individual from their federal taxable income.
Not all tips qualify—mandatory service charges or fees added by employers don’t count—but genuine tips from customers do. For example, a tip when a restaurant who uses auto-gratuity where the tip is mandatory will not count for this deduction under the current law.
Importantly, Social Security and Medicare taxes still apply, so you’ll continue to see those withholdings on your paycheck. But when tax season arrives, that $18,000 or $20,000 in tips you reported could reduce your taxable income directly.
This deduction will start to phase out if your modified adjusted income is greater than $300,000 (married) or $150,000 (for anyone else).
What It Means for Overtime Workers
Individuals who receive qualified overtime compensation may deduct the pay that exceeds their regular rate of pay – such as the “half” portion of “time-and-a-half” compensation — that is required by the Fair Labor Standards Act (FLSA) and that is reported on a Form W-2, Form 1099, or other specified statement furnished to the individual.
For example, if your regular pay is $20 an hour, overtime pays you $30. That extra $10 is the qualified overtime compensation and over the course of a year, it adds up quickly. Workers can deduct up to $12,500 (single) or $25,000 (joint) from taxable income just for that overtime premium.
It is important to note, only overtime required by the FLSA will count. Collectively bargained or additional state mandatory overtime will not count.
Why This Matters
For workers in restaurants, hotels, salons, warehouses, factories, or construction sites—places where tips and overtime are often part of the paycheck—this change can create real savings. Many households may see their taxable income drop by thousands of dollars each year through 2028, when the law is scheduled to expire.
Higher earners, those above $150,000 for single filers or $300,000 for couples, will see the deduction phase out.
What You Should Do Next
Here’s how you can prepare now to take advantage of the new rules:
- Track your earnings carefully. Keep a personal log of your tips and overtime hours worked—don’t rely solely on your employer’s records.
- Check your pay stubs. Make sure your tips and overtime are reported separately and correctly.
- Don’t expect smaller withholdings right away. Taxes will still be withheld during the year; the benefit comes at tax filing time. I
- Contact your YHB advisor today to discuss how we can adjusted withholdings and estimated taxes to increase take home pay.
