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Ext. PublicationNo Tax on Tips and Overtime Compensation: A Game-Changing Break for Workers in the One Big Beautiful Bill Act
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In one of the most significant tax reforms aimed to reward workers in the service industry who put in extra hours on the job, the recently passed One Big Beautiful Bill Act (OBBBA) includes the sections: No Tax on Tips and No Tax on Overtime. These sections exempt up to $25,000 of cash tips for both single and joint filers and $25,000 of overtime compensation ($12,500 for single filers) from federal income tax starting in 2025. This move is being hailed as a long-overdue win for millions of workers who rely on tips and overtime as a core part of their income.
No Tax on Tips Provision
The bill introduces Internal Revenue Code (IRC) Section 224 that allows a deduction for “qualified tips” for tax years 2025 through 2028. The amount allowed as a deduction is up to $25,000 under this section for any taxable year. The allowable deduction is reduced by $100 for every $1,000 by which the taxpayer’s modified adjusted gross income (MAGI) exceeds $150,000 ($300,000 in the case of a joint return).
Married individuals are required to file jointly to claim the deduction.
What counts as qualified tips?
To claim the deduction, qualified tips must be in an occupation that customarily received tips before December 31, 2024. OBBBA included qualifying industries as food service and beauty care businesses. The Treasury is expected to publish an expansive list of occupations that qualify by October 2, 2025. Tips received in a specified service trade or business (SSTB) as defined in section 199A(d)(2) are not considered qualified tips including high-income professionals like doctors, consultants or lawyers. Also, tips received by employees of specified service trade or business are not considered qualified tips.
The deduction also applies to independent contractors receiving tips but the deduction may not exceed the business net income (without regard to this deduction).
Qualified tips under this provision are cash tips, credit card tips or from tip-sharing arrangements and must be voluntary, not subject to negotiation or required by the business and are determined by the payor. Service charges and automatic gratuities added to customer bills will not be considered qualified tips.
How to report qualified tips
For reporting purposes, employers will be required to report both the amount of qualified tips and the employees’ occupation on Form W-2. Also, qualified tips paid to nonemployees must be reported separately on Form 1099.
Certain challenges are anticipated including distinguishing qualified tips and nonqualifying service charges or properly reporting occupations of employees who change roles during the year. The bill has tasked the IRS to prescribe further regulations or other guidance as necessary to prevent misclassification of income as qualified tips, define “customarily tipped occupations” and ensure businesses and individuals comply with reporting and documentation requirements.
No Tax on Overtime Provision
The bill also introduces IRC Section 225 that allows a deduction for “qualified overtime” for tax years 2025 through 2028. The deduction amount allowed under this section for any taxable year is up to $12,500 for single filers and $25,000 for joint filers. The allowable deduction is reduced by $100 for every $1,000 by which the taxpayer’s modified adjusted gross income (MAGI) exceeds $150,000 or $300,000 in the case of a joint return.
Married individuals are required to file jointly to claim the deduction.
What counts as qualified overtime compensation?
Under the provision, qualified overtime compensation means overtime compensation paid to an individual required under Section 7 of the Fair Labor Standards Act (FLSA) of 1938 that is in excess of the regular rate. Most employers are required to pay time and a half (1.5 times the regular hourly rate) when a nonexempt employee works more than 40 hours in a work week. Qualified overtime compensation under the new bill only includes the pay that exceeds the regular rate of pay, such as the “half” portion of “time-and-a-half.”
How to report qualified overtime compensation
For reporting purposes, qualified overtime received by employees must be accounted for and reported separately on Form W-2. Also, qualified overtime paid to nonemployees must be specifically identified and reported separately on Form 1099.
Expected challenges include different overtime calculation methods used by certain states compared to FLSA that may result in unqualified deduction amounts for federal purposes. The bill has tasked the IRS to prescribe further regulations or other guidance as may be necessary to prevent abuse of the deduction.
Ways the New Provisions Impact Information Returns Reporting
OBBBA’s Section 70432 repeals the revision of de minimis rules for Form 1099-K reporting enacted by the American Rescue Plan Act of 2021 (ARPA). This section changes Form 1099-K reporting requirements for third-party settlement organizations to $20,000 on more than 200 transactions. It applies retroactively to calendar years beginning after December 31, 2021.
Section 70433 of the bill increases the filing threshold for Forms 1099-NEC and 1099-MISC to $2,000 for tax years beginning after December 31, 2025. The filing threshold will be adjusted based on inflation for any calendar year after 2026.
While implementation details and compliance measures will evolve, workers and businesses should begin preparing for these changes now, ensuring accurate tip and overtime tracking and reporting systems are in place.
Prepare for OBBBA With Confidence
While the OBBBA opens the door to significant federal tax relief, the details matter. Preparing now with the right documentation, reporting processes and guidance can help ensure you’re ready when the law takes effect. Contact us. Weaver can help you understand and adapt to these changes.
Authored by Narbeh Aghazarian and Kolette LeBlanc
©2025
