Now is the time to make sure you understand how tips and overtime earnings affect your tax situation. In this piece, Staff Accountant Faith Reinard outlines the deductions you may be eligible for, the filing requirements that apply and important phase-outs every taxpayer should be aware of.
The Big Picture
The One Big Beautiful Bill Act (OBBBA) was signed into law by President Donald Trump on July 4, 2025. The OBBBA covers a wide range of topics including extending or making permanent some tax provisions from the Tax Cuts and Jobs Act (TCJA) that were set to expire at the end of 2025, as well as focusing on decreasing tax burdens for individuals.
The TCJA came into effect in 2017 and introduced a number of temporary tax provisions that aimed to decrease taxes owed by individuals. Some of the temporary provisions included a higher standard deduction, increased Child Tax Credit, and lower ordinary tax rates. These provisions were made permanent when President Trump signed the OBBBA into law.
Along with the permanent changes, the OBBB adds additional temporary tax deductions that continue towards the same goal of decreasing tax burdens on individuals. Some of these changes include an increased State and Local Taxes (SALT) paid deduction, additional deductions for individuals over age 65, auto-loan interest deduction, and deductions for qualified tips and overtime earned. This article will focus on the deductions for qualified tips and overtime earned.
Deduction For Qualified Tips
For tax years 2025 through 2028, individuals can claim a deduction for any qualified tips that they earn during the year.
Qualified tips are defined as cash or cash equivalent tips received by employees that are paid at the discretion of the payor. Qualified tips also include any amounts received in tip-sharing arrangements, regardless of whether the arrangement is mandatory or voluntary. The amounts paid must not be a result of negotiation or mandatory payments, such as service charges. The employee receiving cash tips must also have a valid social security number to qualify for the deduction.
Another requirement tips must be derived from an occupation that is deemed to have “customarily and regularly” received tips before December 31, 2024. The Treasury Secretary has compiled a list of occupations that meet this definition, see Table A below. This list is not exhaustive and is intended to provide an overview of some of the occupations that are eligible to receive qualified tips for the purposes of the deduction. See the list published by the U.S. Department of the Treasury for a complete listing of these occupations.
Also, in order for tips to qualify, the employee must not be working for a specified service trade or business. A specified service trade or business is any field of work where the reputation or skill of an employee or owner of a business is the key factor in generating income. Some examples of specified service trades or businesses include health care, law, accounting, athletics, and performing arts.
Table A
| Categories | Specific Occupations |
| Beverage and Food Service |
Bartenders Wait Staff Chefs Food Preparation Workers |
| Entertainment and Events |
Gambling Dealer/Cashier Dancer Musician Content Creator |
| Hospitality and Guest Services |
Bellhop Concierge Hotel/Motel/Resort Desk Clerk Housekeeper/Maid |
| Home Services |
Home Maintenance/Repairs Home Landscaping/Groundskeeping Electrician Plumber Cleaning Service Worker |
| Personal Services |
Private Event Planner Private Event Photographer/Videographer Tutor Nanny/Babysitter |
| Personal Appearance and Wellness |
Skincare Specialist Massage Therapist Hairdresser Manicurist/Pedicurist Fitness Instructor Tattoo Artist/Piercer |
| Recreation and Instruction |
Golf Caddy Tour Guide Travel Guide |
| Transportation and Delivery |
Parking/Valet Attendant Taxi/Rideshare Driver Goods Delivery Worker Personal Vehicle Cleaner Home Mover |
The maximum deduction allowed for qualified tips is $25,000 regardless of whether the taxpayer has a filing status of single or married filing jointly. The deduction is a dollar for dollar decrease in taxable income on all qualified tips earned, as long as they do not exceed the maximum deduction allowed. Once the taxpayer’s income reaches a certain threshold, there is a 10% phase out. The maximum deduction allowed and the phase out will be discussed later on in this article.
Deduction for Qualified Overtime
Similarly to the deduction for qualified tips, there is a provision in place for tax years 2025-2028 that allows individuals to deduct qualified overtime pay from their taxable income. Qualified overtime is any compensation that is required to be paid to an employee who has a valid social security number, under section 7 of the Fair Labor Standards Act of 1938 that is in excess of their regular hourly pay rate. The following is an example of how qualified overtime would be calculated.
Taxpayer A is paid a regular hourly rate of $40/hour. They get paid time and a half for any hours over 40 that they work in a given week. If Taxpayer A worked 55 hours in one week, what would their qualified overtime for that week be?
Hourly overtime pay: $40 * 1.5 = $60/hour
Qualified overtime pay deductible for this week: ($60 – $40) * (55 – 40) = $300
The maximum deduction for qualified overtime in a given year is $12,500 for single filers, and $25,000 for those married filing jointly. Once a certain threshold is met, there is a 10% phase out for this deduction, which will be discussed further later on.
Filing Requirements and Phase Outs
The deductions for qualified tips and qualified overtime can be claimed by all eligible taxpayers, regardless of whether they are itemizing their deductions or taking the standard deduction. In order for a married taxpayer to claim either of these deductions on their tax return, they must be married filing jointly (MFJ). Married taxpayers that are filing separately are not eligible to take these deductions.
There are modified adjusted gross income (MAGI) thresholds for each of these deductions. See Table B below for a summary of the MAGI threshold amounts. Once the threshold has been met, the 10% phase out begins. The maximum deduction allowed decreases by $100 for every $1,000 that MAGI exceeds the threshold by. For example, if a single taxpayer has MAGI of $160,000 their allowable deduction for qualified tips will decrease from $25,000 to $24,000, and their allowable deduction for qualified overtime will decrease from $12,500 to $11,500.
Table B
| Phase Out Begins | Total Phase Out | |||
| Deduction | Single | MFJ | Single | MFJ |
| Qualified Tips | $150,000 | $300,000 | $400,000 | $500,000 |
| Qualified Overtime | $150,000 | $300,000 | $275,000 | $550,000 |
Disclosure of Qualifying Amounts by Employers and Taxpayers
In order to claim the deduction for qualified tips, the amount of tips received as well as the occupation of the taxpayer must be disclosed by the employer. At this time, it is uncertain how this information will be reported to the IRS, as the IRS has announced that Form W-2 and Forms 1099 will remain unchanged for the 2025 tax year. These forms will be updated and additional information about reporting is expected to be released for the 2026 tax year. The IRS will provide transition relief for tax year 2025 for taxpayers claiming the deduction and employers subject to the new reporting requirements.
The deduction will be calculated on a new schedule of Form 1040 in 2025: Schedule I-A. The Additional Deductions form will report the No Tax on Tips, No Tax on Overtime, No Tax of Car Loan Interest, and the Enhanced Deduction for Seniors. This schedule is still in draft form and can change before the 2025 Form 1040 is finalized.
As the IRS issues updates to the regulations and forms continually, please contact us and we will ensure you have the most up to date information.
Sources
Big Beautiful Bill Explained: Tax Changes FAQ | Tax Foundation
