One Big Beautiful Bill Act: What the New Deductions Mean for Tips and Overtime
Published on by Ben Emerson, Chaleise Fleming, in Tax Services
With the passage of the One Big Beautiful Bill Act (OBBBA), many taxpayers—especially those in hospitality, healthcare, manufacturing, and construction—are asking: How does this impact tips and overtime pay?
The short answer: OBBBA introduces two major “above-the-line” deductions, one for qualified tips and one for qualified overtime compensation. But it’s important to note these are not full tax eliminations—they are temporary deductions available from 2025 through 2028.
Deduction for qualified tips
Under OBBBA, individuals in tip-based occupations can deduct up to $25,000 per year in qualified tips reported as income. Here’s what you need to know:
Qualified tips defined:
- Qualified tips must be determined as voluntarily paid by the customer, and are not subject to negotiation or policy set employer policy.
- Mandatory service charges or automatic gratuities for large parties do not qualify.
- Tips may be received via cash, credit card, or tip-sharing arrangements, not just physical cash.
Occupational requirements:
- The deduction applies only to occupations that customarily and regularly received tips on or before December 31, 2024.
- Excluded professions include law, accounting, finance, banking, consulting, athletics, actuarial services, performing arts, and farming—categorized as, “specified service trades or businesses.”
Reporting and limitations
- Tips must be properly reported to qualify.
- This is an “above-the-line” deduction. It is available to all filers, whether they itemize or take the standard deduction.
- It is phased out beginning at a Modified Adjusted Gross Income (MAGI) of $150,000 for single filers and $300,000 for joint filers, reduced by $100 for every $1,000 (or fraction thereof) above those thresholds.
- Married individuals must file jointly to claim the deduction.
- These tips are still subject to Social Security and Medicare taxes and must be tracked accordingly for payroll and reporting purposes.
- Qualified tips are excluded from Qualified Business Income (QBI) under IRC § 199A.
Deduction for qualified overtime compensation
A separate but similarly structured deduction is available for qualified overtime compensation, allowing individuals to deduct up to $12,500 per year (or $25,000 for joint filers) in premium overtime pay. Key details include:
Qualified overtime defined:
- Overtime must be required under section 7 of the Fair Labor Standards Act (FLSA) and must represent pay in excess of the employee’s regular hourly rate.
- Overtime required only under state law or union agreements does not qualify.
Eligibility and phaseout:
- This is an “above-the-line” deduction, and therefore is available whether you itemize or take the standard deduction.
- It is phased out using the same income thresholds and reductions as the tips deduction.
- Joint filing is required to claim the deduction as a married taxpayer.
Reporting requirements:
- Employers must separately report qualified overtime compensation on W-2s beginning in 2025.
- For the initial year, employers may use a “reasonable method” to determine overtime for W-2 reporting.
Why this matters:
These provisions offer significant potential tax relief for individuals working in tip-heavy or overtime-intensive industries, particularly hospitality, healthcare, construction, and manufacturing. But they also come with nuanced definitions, reporting requirements, and income limitations.
Employers should begin preparing now by updating payroll systems and training staff on the new requirements. And while we expect the IRS to issue additional guidance in the coming months, advance planning is key.
Let’s talk!
If you have questions about whether your tips or overtime qualify, or how to optimize your tax position under the One Big Beautiful Bill Act, we’re here to help. Contact us today for a free consultation, and let’s talk through your unique situation so you’re prepared for 2025 and beyond.
You may also be interested in our resource library of OBBBA coverage – compiled in a single link for ease of reference.
