OBBBA No Tax on Tips and Overtime Explained

Are Tips and Overtime Really Tax-Free Under OBBBA?

One of the most talked-about features of the One Big Beautiful Bill Act (OBBBA) is the headline-grabbing “no taxes on tips and overtime” provisions. While it’s true that OBBBA introduces new deductions for qualifying tip income and overtime pay, claiming this deduction is more nuanced and packed with important limitations, filing requirements, and misconceptions.

Let’s unpack what these new no tax on tips and overtime provisions actually allow, who qualifies, and what steps you should take to benefit fully from this new tax relief.

The Bottom Line Up Front

No, tips and overtime aren’t “tax-free” in the purest sense. They’re still taxable income, but OBBBA allows you to deduct a limited portion of them from your adjusted gross income (AGI) even if you don’t itemize. Think of them as new above-the-line deductions, not exclusions, and there are a lot of specific limitations that may prevent you from claiming this deduction in its entirety.

The Overtime Deduction: What It Is and Who Qualifies

What OBBBA Allows:

• • Taxpayers may deduct up to:
    • $12,500 of qualified overtime income (single)
    • $25,000 (married filing jointly)
  • Applies to tax years 2025 through 2028
  • Above-the-line deduction—you don’t need to itemize to claim this

What Counts as “Overtime”?

• • Must be pay received for working more than 40 hours in a workweek
  • Must comply with Section 7 of the Fair Labor Standards Act (meaning that employees who are exempt from overtime pay as stipulated in this section likely will not be able to benefit from this deduction)
  • Pay must be: Reported on Form W-2 or an equivalent info return under §6041(d)(4). They also must be paid at a rate higher than your regular hourly rate
  • Tips do not count as overtime (they have a separate deduction)

Who’s Eligible?

• • You must have a Social Security Number (SSN)
  • Married taxpayers must file jointly to qualify
  • You must meet income thresholds (see below)

Income-Based Phaseout:

• • Begins at:
    • $150,000 MAGI for individuals
    • $300,000 MAGI for joint filers
  • Deduction is reduced by $100 for every $1,000 over the limit

Reminder: MAGI (Modified Adjusted Gross Income) = AGI plus foreign earned income or income from U.S. territories (e.g., Puerto Rico, Guam)

The Tips Deduction: What It Covers and How to Claim It

What OBBBA Allows:

• • Deduction of up to: $25,000 per year in qualifying tip income (all filers)
  • Applies to tax years 2025 through 2028
  • Also above-the-line (no itemizing required)

What Counts as a “Tip”?

The law provides a fairly strict definition in that they must be voluntary, non-negotiated, and at the customer’s discretion. This includes cash tips, credit/debit card tips, and tips distributed via tip pooling. These can be earned by both employees and self-employed workers.

Special Occupation Requirement:

• • You must work in an occupation that customarily received tips on or before Dec. 31, 2024
  • The IRS will publish a list of these qualifying occupations, but examples you can likely expect to be included are servers, bartenders, hair stylists, nail technicians, hotel and valet staff, and spa or massage workers.

Note: If you work in a “specified service trade or business” (SSTB) under §199A, your eligibility depends on whether you are classified as an employee.

Documentation and Reporting Requirements:

To claim the deduction:

• • You must report your tips properly on IRS-approved forms, such as:
    • Form 4137 (Social Security/Medicare tax on unreported tip income)
    • Form W-2
    • Form 1099-NEC or 1099-K
  • You must include your SSN on the tax return
  • Married taxpayers must file jointly to claim the deduction

Income-Based Phaseout:

Same thresholds as overtime:

• • $150,000 MAGI (individuals)
  • $300,000 MAGI (MFJ)
  • Deduction is reduced by $100 for every $1,000 over the threshold

Planning Considerations

You Don’t Have to Itemize – Both the overtime and tip deductions are above-the-line, meaning they reduce your AGI regardless of whether you take the standard deduction or itemize. This is particularly valuable for workers who don’t have enough deductions to itemize, but still want meaningful tax relief.

Maximize Through Proper Reporting – Make sure you’re accurately and transparently reporting all tip and overtime income on your W-2 or relevant 1099 forms. The IRS will be issuing updated withholding tables in 2026, and employers will be required to report tips and overtime pay separately.

If Married, File Jointly to Qualify –If you’re married, filing separately disqualifies you from claiming either deduction.

Stay Under the Thresholds if You Can- For those near the MAGI phaseout limits, timing bonuses, Roth conversions, or investment income could affect eligibility. Careful income planning may help preserve your deduction.

No Tax on Tips and Overtimes Common Misconceptions

Let’s be clear:

• • This does not mean tips and overtime are tax-free at the source
  • Employers will still withhold income taxes from your paycheck as usual
  • You’ll claim the deduction when you file your annual tax return
  • This deduction is limited based on the above restrictions, meaning not all tips and overtime are automatically tax free.

Final Thoughts

The OBBBA’s tip and overtime provisions offer meaningful tax relief, but they’re not automatic, and they come with very specific guardrails. Make no mistake, these deductions require accurate documentation, proper filing, and strategic planning. Employers will need to adjust their reporting, and taxpayers should take care to track qualifying income clearly and separately.

For service workers, tradespeople, and hourly employees, these deductions could represent thousands in tax savings each year, but it’s important to understand them and how to be eligible for them. If you need assistance understanding how to qualify or what to track, please connect with us online, or reach out to us directly at 1-770-495-9077 or email us at [email protected].

The above article only intends to provide general financial information and is based on open-source facts, it is not designed to provide specific advice or recommendations for any individual. It does not give personalized tax, financial, or other business and professional advice. Before taking any form of action, you should consult a financial professional who understands your particular situation. CKH Group will not be held liable for any harm/errors/claims arising from the articles. Whilst every effort has been taken to ensure the accuracy of the contents, we will not be held accountable for any changes that are beyond our control.