The financial strain caused by federal taxes on tips and overtime pay has long been a burden for service workers and the employers who support them. In a historic bipartisan move, the “One Big Beautiful Bill” has been signed into law, delivering on promises to eliminate federal income tax on tips and overtime.
1. A Landmark Win for Workers — and Bipartisan Cooperation
The “No Tax on Tips and Overtime” policy had rare bipartisan momentum:
- Donald Trump, who made it a campaign pledge.
- Kamala Harris, who voiced strong support during her own run.
- President Biden, whose administration confirmed he would sign the legislation if passed.
On Friday, July 5, 2025, the bill was officially signed into law. This is a transformative moment acknowledging the critical role that tipped and overtime-reliant workers play in the U.S. economy.
2. What’s in the Law: How the Deductions Work
No Tax on Tips
- Workers can now deduct up to $25,000 in tip income above the line on their federal return.
- Applies to tips that are voluntarily paid — not mandatory service charges.
- Available from tax years 2025 through 2028.
- Phases out for individuals earning more than $150,000 (or $300,000 for couples).
No Tax on Overtime
- Deduction of up to $12,500 per individual, or $25,000 for couples filing jointly.
- Only applies to FLSA-defined overtime — not state-only or contractual OT. Therefore, California’s daily overtime earned for work over eight hours in one day would not be eligible for this tax benefit.
- Follows the same income and time limits as the tips provision.
While state/local taxes and payroll taxes still apply, the federal income tax relief is estimated to save workers thousands annually.
3. Implementation Still in Progress
The IRS and Treasury Department will now begin the process of writing the rules that guide:
- Which jobs and positions are eligible.
- How tips and OT must be reported.
- What counts as a qualified tip or overtime payment under the law.
Employers should be ready to adapt their payroll and reporting systems — and expect further clarification in the coming months.
4. What’s Next for Employers
While the law offers much-needed relief, it also brings new considerations:
- Reworking W-2 classifications to reflect tip/overtime separation.
- Determining which staff fall within the qualified categories.
- Preparing documentation to support employees who take the new deductions.
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MARK SMITH
Smith Policy Group
1001 K Street, 6th Floor
Sacramento, CA 95814
(916) 335-5072