Two significant tax changes, including the elimination of tax on tips and overtime, were introduced in the One Big Beautiful Bill Act (OBBBA) passed on July 4, 2025. Here’s what you need to know about these two tax breaks, along with questions that still need answering before filing your 2025 tax return.

How much you can deduct

1. No Tax on Tips. You can deduct up to $25,000 in qualified tips from your federal taxable income. The deduction phases out above $150,000 ($300,000 for joint filers).
2. No Tax on Overtime. Up to $12,500 in qualified overtime pay can be deducted from your taxable income ($25,000 for those filing jointly). The deduction also phases out for incomes exceeding $150,000 ($300,000 for joint filers).

Who qualifies for the tip and overtime tax break

Obvious jobs, such as servers and bartenders, will likely qualify for a deduction of their tips. However, there are numerous other occupations that frequently or occasionally receive tips. The IRS has to provide a more detailed list of what tips will qualify. Until then, there will be some uncertainty.

Regarding overtime, the tax bill uses the Department of Labor‘s definition of working beyond 40 hours in a single workweek for non-exempt employees. The deduction only applies to the overtime portion of the pay (i.e., the one-half of the time-and-a-half). But there are still some gray areas. For example, what happens if a worker receives a bonus or comp time instead of an hourly wage?

Reporting is key

Employers must separately report qualified tips and qualified overtime on an employee’s Form W-2 or a contractor’s Form 1099. The problem is that 1099s do not currently have a spot to report tips (the W-2 currently has a box for allocated tips), while both W-2s and 1099s don’t have a spot to report overtime.

There are also withholding questions. While there’s a tax break for tips and overtime up to a certain dollar amount, this only applies to federal income taxes. Tips and overtime are still subject to other taxes, including Social Security, Medicare, and state income taxes. Employers will have to distinguish between fully taxable income and income that’s only subject to Social Security, Medicare, and other taxes.

More details to come on tip and overtime tax

The OBBBA addresses some of this uncertainty by allowing 2025 to be a transition year. During this time, the tax-free income must be on the reformatted W-2s and 1099s. And it’s a good thing because the 2025 format has already been approved and provided to printers and software companies. The IRS is mandated within the OBBBA to come up with what it will accept as proof of your 2025 earnings. Until that guidance is available, you should:

• Immediately compile your overtime and tip income from the beginning of the year.
• Retain any documentation that can prove the amount you are going to claim.
• Review your pay stubs to see if tip and overtime income display separately from your normal earnings. If so, you may have what you need. If not, contact your employer immediately and ask what they are planning to do to provide proper documentation.

The IRS states that it will publish additional guidance by mid-to-late October. Keep checking our blog posts for answers to these and other questions, hopefully before you must file your 2025 tax return. In the meantime, contact our RRBB advisors if you have any questions.