The One Big Beautiful Bill Act, signed into law on July 4, 2025, offers temporary tax relief for workers who earn tips or overtime pay. You can deduct qualified tips up to $25,000 a year from your federal income tax.
For overtime, the limit is $12,500 if you file single or $25,000 if married filing jointly. These deductions last through 2028 and apply back to January 1, 2025. They phase out for higher earners starting at $150,000 for singles or $300,000 for joint filers, based on your modified adjusted gross income. Social Security and Medicare taxes still apply, so your benefits stay protected.
This change helps service workers and those in demanding jobs keep more of their hard-earned money, adding thousands to your take-home pay each year. Workers in hospitality, transportation, and healthcare gain the most. Employers need to update how they report earnings. Keep good records and check your state tax rules, since not all states follow federal changes. The benefits end in 2028, so plan ahead. Update your payroll now and talk to a tax expert for your 2025 return.
How These Changes Started
These rules began as ideas during the 2024 election to help everyday workers fight rising costs and flat wages. Leaders promised no federal income tax on tips and overtime for those who need it most. Separate bills first proposed the details, but they joined a larger tax package called the One Big Beautiful Bill Act. President Trump signed it on July 4, 2025, making it work from the start of the year. The act covers more than tips and overtime. It also adds deductions for seniors’ Social Security benefits and car loan interest. The goal is bigger paychecks, up to $10,000 more a year for many families.
Workers in service jobs and overtime roles face tough economic times. Tips make up a big part of pay in places like restaurants, but they used to get taxed fully. This often meant higher taxes on unsteady income. Overtime, required by labor laws for extra hours over 40 a week, also got taxed completely. This cut into what workers took home. By 2025, many in these jobs earned around $27,000 a year including tips, or added $5,000 to $10,000 from overtime. The new rules last only four years to test their impact. Experts estimate the government will lose $100 billion to $200 billion in revenue during that time. Use this window wisely for your finances.
How the Deductions Work
The law adds new rules to the tax code for above-the-line deductions. These lower your adjusted gross income before other calculations. You benefit whether you itemize or take the standard deduction. Tips and overtime stay out of federal income tax up to the limits, but payroll taxes continue.
For tips, deduct up to $25,000 if they come from jobs where tipping is common, like servers, bartenders, or hair stylists. The IRS lists eligible jobs based on norms as of late 2024. Gig workers, such as ride-share drivers, qualify if tipping is standard. Report tips on your W-2 or a special form for unreported ones. Self-employed folks limit it to their net income from the work. The deduction shrinks as your income rises over $150,000 single or $300,000 joint. For every $1,000 above the limit, you lose $100 of the deduction. Tips still face Social Security and Medicare taxes, split between you and your employer. Businesses can now claim a bigger credit to cover their share.
Overtime deductions focus on the extra pay premium, like the half in time-and-a-half. It must follow federal labor rules for hours over 40 a week. Caps are $12,500 single or $25,000 joint, with the same income phase-out. This helps workers in manufacturing, healthcare, and trucking. Voluntary overtime or state-specific rules do not count unless federal law requires it. Payroll taxes apply fully. For 2025, employers can estimate amounts if needed.
The rules work for earnings from early 2025. You need a Social Security number on your return. Married couples must file jointly. The IRS plans easier withholding and forms for next year. These changes end December 31, 2028, unless renewed.
Examples of How This Helps You
Picture a single server earning $40,000 in wages plus $30,000 in tips. Before, taxes on all tips could cost $3,000 to $4,000. Now, deduct $25,000 to save $3,000 to $5,500, based on your tax bracket. This adds 10% to 15% more to your pocket, especially in no-income-tax states.
A married couple driving for a ride-share service earns $20,000 in tips each. If their total income stays under $300,000, they deduct up to $25,000 together. This saves over $5,000 in taxes while keeping Social Security credits.
A nurse working 50 hours a week at $40 an hour gets $8,000 in overtime premium. As a single filer with $80,000 income, she deducts it all to save about $1,760 at a 22% rate. This supports taking extra shifts.
A factory worker with $30,000 base pay plus $5,000 overtime deducts the full overtime. This cuts her tax by $600 at 12%, freeing up cash for family needs.
A construction foreman and spouse with $320,000 income see their $25,000 overtime deduction drop by $2,000 due to phase-out. They still save on the rest.
Crypto tips, like digital payments in apps, count if valued and reported like cash. States differ: some match federal savings, others tax fully.
Steps to Get Started
Track your tips or overtime with apps, stubs, or notes. Match them to your W-2 or 1099. Use the IRS form for any unreported tips.
Employers, update payroll to show these amounts separately. Send statements by early 2026. Use IRS guides for estimates this year.
Claim on your 2025 tax return using Schedule 1. Attach proof if checked. Pick software that handles the new law.
Adjust your W-4 form to lower withholding now. Avoid big refunds later.
Talk to a tax pro for income limits or state issues. Check how it affects other credits.
Share this with your network. Track earnings today to claim the most.
Things to Keep in Mind
Watch for IRS checks on claims, especially in gig jobs. Guidance on details comes later this year. Relying too much might raise future costs if rules change. Look at how treaties affect international workers or crypto values. Follow IRS news and plan for 2029.
We make taxes easy at Elevated Tax Strategies. Your success is our goal. We care about you and your business. You’re in good hands with our team. We aim to be the most responsive tax firm in America. Reach out for help with these changes.
