The recently passed One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, introduced two major tax breaks that could benefit millions of workers: No Tax on Tips and No Tax on Overtime. While both provisions offer potential savings, there are still unanswered questions about how they’ll be implemented. Here’s a breakdown of what we know so far.
How much can be deducted?
- Tips: Up to $25,000 in qualified tip income can be excluded from federal taxable income. This benefit begins to phase out once income exceeds $150,000 ($300,000 for joint filers).
- Overtime: Up to $12,500 in overtime pay can be excluded ($25,000 for joint filers). The deduction also phases out over the same $150,000/$300,000 income thresholds.
Who qualifies?
Servers and bartenders are obvious candidates for the tip exclusion, but many other professions also receive tips. The IRS is required to release a complete list of qualifying occupations later this year.
For overtime, the deduction follows the Department of Labor’s definition: hours worked beyond 40 in a week for non-exempt employees. Only the overtime premium (the “half” portion of time-and-a-half) qualifies. It remains unclear how alternative pay arrangements, such as bonuses or comp time, will be treated.
Employer reporting requirements
Employers will need to separately report eligible tip and overtime income on employee W-2s and contractor 1099s. However, the current forms don’t yet include separate boxes for this reporting, which creates logistical challenges.
It’s also important to note that while tips and overtime may be exempt from federal income tax, they are still subject to Social Security, Medicare, and state taxes. Employers will need to distinguish between income types for proper withholding.
Transition year for 2025
Recognizing these challenges, OBBBA designates 2025 as a transition year. This means businesses and payroll providers have time to adapt before new W-2 and 1099 formats are rolled out.
Next steps for employees
Until further IRS guidance is released (expected mid-to-late October 2025), employees should:
- Track all tip and overtime income starting January 1, 2025.
- Keep supporting documentation (such as pay stubs or employer reports).
- Ask employers how they plan to report these earnings.
Final thoughts
These new provisions could significantly reduce taxable income for many workers. But since rules and forms are still being finalized, careful recordkeeping and communication with employers will be key. More clarity from the IRS is expected before the 2025 filing season.