No Tax on Overtime and No Tax on Tips: The "One Big Beautiful Bill Act," which went into effect on July 4, 2025, will change the way many Americans handle their money. It will allow people to deduct tips and extra pay from their federal income taxes. This change in the law, which takes effect on January 1, 2025, is part of a plan to give workers more power and stimulate the economy by letting them keep more of the money they earn. While these changes offer welcome relief, understanding the specifics, who qualifies, and how it impacts your take-home pay and tax filings is crucial.
What is No Tax Overtime Provision?
The new law's most important part is the "no tax on overtime" rule, which lets people who qualify for overtime pay get a federal income tax deduction. This doesn't mean that all of your overtime is tax-free. It just means that you can take a certain amount of it off your gross income when you file your federal taxes.
Eligiblity
This deduction mostly applies to workers who are not exempt and get paid overtime under the Fair Labor Standards Act (FLSA). This usually includes hourly workers who get paid time and a half for every hour they work over 40 in a week.
Deduction Cap
For people who file their own taxes, the most they can deduct for qualified overtime pay is $12,500 a year. For married couples filing jointly, this cap is $25,000 annually.
Duration
This provision is set to be effective for tax years 2025 through 2028. Unless extended by future legislation, the deduction will expire after 2028.
Employers are still required to withhold federal income, Social Security, and Medicare taxes from your overtime wages as usual. The benefit comes in the form of a deduction when you file your annual tax return, potentially leading to a larger refund or a lower tax liability.
Check Out: What is One Big, Beautiful Bill Act? Check Key Features and Latest Updates
What is No Tax on Tips?
The "no tax on tips" measure is like the overtime provision in that it lets you deduct qualified tip income "above the line." This means you can lower your Adjusted Gross Income (AGI), which will lower the amount of tax you have to pay.
Eligibility
The deduction applies to employees who regularly and routinely get tips. This includes a wide range of people who work in the service industry, such as restaurant workers, rideshare drivers, and delivery people. The legislation also extends to both traditional W-2 employees and 1099 independent contractors.
Deduction Cap
The deduction for tip income is capped at $25,000 annually. It begins to phase out for individuals earning over $150,000 and for joint filers earning over $300,000.
Tax Impact
Like overtime, tips are still subject to Social Security and Medicare (FICA) taxes, as well as state and local income taxes. The deduction specifically targets federal income tax.
Key Consideration for 2025
The U.S. Treasury will not update withholding tables until after the 2025 tax year. This implies that federal income tax will continue to be withheld from tips as usual throughout 2025. Employees will realize the benefit as a larger tax refund when they file their 2026 tax returns for the 2025 tax year.
Great news, Missouri!
— Missouri Lt. Governor David Wasinger (@LtGovWasinger) July 16, 2025
Thanks to @POTUS One Big Beautiful Bill, Missourians will see:
📈 $3,400–$6,100 in wage growth
💵 $7,000–$9,800 more in take-home pay
👵 1M seniors keep EVERY dollar of Social Security
👷 No tax on tips or overtime
These are huge wins for Missouri… pic.twitter.com/49evOxS2gp
Will No Tax Overtime or No Tax on Tips Affect Your State Taxes?
The No Tax on Overtime and No Tax on Tips provisions under the One Big Beautiful Bill Act specifically address federal income tax. As of now, these federal deductions do not automatically apply to state income taxes. Many states are considering or have introduced their own legislation to exempt tips and/or overtime from state income tax, but these are separate initiatives. For instance, Alabama's previous exception for overtime expired in June 2025. It's advisable to check your specific state's tax laws or consult a tax professional for information regarding state-level implications.
Check Out: List of 9 Fastest Growing Cities in the US for Jobs 2025 [Updated]
The No Tax on Overtime and No Tax on Tips rules are a big step by the federal government to help millions of American workers with their money. People can better plan their money and get the most out of this new law by learning the details of these deductions, such as who can use them, how much they can use them, and how they are different for federal and state taxes. If you want to get the best tax results in the future, you need to stay up to date on these changes
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