Starting in the 2025 tax year, a new federal law introduced significant tax benefits for millions of workers in the United States. Thanks to the One Big Beautiful Bill Act, many employees may now be able to reduce their federal taxes on income earned from tips and overtime.

If you work in industries such as restaurants, hospitality, beauty services, transportation, or any field where tips are common or overtime is regularly worked, this new deduction could help you pay less in taxes and potentially increase your tax refund.

Below, we explain how it works and how you can take advantage of this benefit when filing your taxes.

Tax Deduction for Tips

The new law allows certain workers to deduct part of their tip income from their federal taxable income. This means that money earned through tips may reduce the amount of income that is subject to federal income tax when you file your tax return.

Who May Qualify?

Workers and independent contractors who regularly receive tips may qualify, including:

• Servers and bartenders
• Rideshare or delivery drivers
• Hairstylists and salon workers
• Personal trainers
• Other workers in occupations where tipping is customary

What Tips Qualify?

Generally, qualifying tips are those that are:

• Voluntary payments made by customers
• Received in cash or through card payments
• Distributed through tip-sharing or tip-pooling systems among employees

Deduction Limit

Taxpayers may deduct up to $25,000 per year in qualified tips.

However, this deduction begins to phase out when modified adjusted gross income exceeds:

• $150,000 for individual filers
• $300,000 for married couples filing jointly

Tax Deduction for Overtime Pay

Another key part of the law allows workers to deduct a portion of the income earned from overtime pay.

Overtime is typically paid at time and a half (1.5 times the regular hourly wage). Under this new deduction, taxpayers may subtract the additional portion of overtime pay, meaning the extra amount earned beyond the regular hourly rate.

Deduction Limit

The deduction allows:

• Up to $12,500 per year for individual taxpayers
• Up to $25,000 for married couples filing jointly

Like the tip deduction, this benefit may begin to phase out once income exceeds $150,000 for individuals or $300,000 for joint filers, depending on filing status.

Important Things to Know

Although many people refer to this benefit as “no tax on tips or overtime,” it is important to understand that:

• The deduction applies only to federal income tax.
• Social Security and Medicare taxes (FICA) still apply to these earnings.
• State and local taxes may also apply depending on the state where you live.

How to Claim These Deductions

To take advantage of these benefits when filing your tax return, it is important to:

• Report all tips accurately
• Ensure your income appears on forms such as W-2 or 1099
• Keep records of tips and overtime throughout the year
• Work with a tax professional to ensure you claim all available deductions

Maximize Your Tax Return

These new deductions are available from the 2025 tax year through 2028, meaning workers who receive tips or earn overtime may see significant tax savings during this period.

Proper tax planning can help you:

• Reduce your federal taxable income
• Avoid mistakes on your tax return
• Potentially receive a larger tax refund

If you work in an industry where you earn tips or overtime pay, consulting a tax professional can help ensure you take full advantage of these new tax benefits.

✅ Need help with your tax return?

Our team can help you prepare your taxes accurately and maximize the new deductions available to workers in the United States.