The IRS has released its guidance for the “no tax on tips” and “no tax on overtime” provisions of the One Big Beautiful Bill Act (OBBBA), for workers who can claim the deductions for the 2025 tax year.
President Donald Trump signed the OBBBA into law in July after Republican majorities in Congress passed the tax reform and spending bill on a party-line vote this summer.
The law included “no tax on tips” and “no tax on overtime,” and the Treasury Department and IRS are now providing guidance as the law directed to help workers determine their deductions.
The IRS notice said that taxpayers who are eligible to claim the tipped and overtime income deductions may have to determine those amounts separately this year as Form W-2 and Form 1099 won’t be updated to include income from tips and overtime for the 2025 tax year.
Taxpayers may review examples in the IRS guidance that illustrate how the tipped income and overtime deductions work based on the relevant reported or unreported income they received.
Under the OBBBA, workers who receive qualified tips can deduct up to an annual maximum of $25,000 and the deduction phases out for taxpayers with a modified adjusted gross income over $150,000 (or $300,000 for joint filers).
The IRS estimates there are about 6 million workers who report tipped wages, and the tipped income deduction is in effect for tax years 2025 to 2028.
The “no tax on overtime” provision allows individuals who receive eligible overtime compensation to deduct the pay that exceeds their regular pay – which is generally the “half” portion of “time and a half” overtime pay – that is reported on a Form W-2, Form 1099 or other specified statement provided.
The maximum annual deduction is $12,500 (or $25,000 for joint filers) and the deduction phases out for taxpayers with a modified adjusted gross income over $150,000 (or $300,000 for joint filers). Notably, the deduction is available for itemizing and non-itemizing taxpayers.
The Fair Labor Standards Act requires that most employees be paid at least the federal minimum wage for all hours worked and overtime pay of at least time and one-half of their regular pay rate for working more than 40 hours in a week.
However, some employees are exempt from overtime rules, such as those who are paid a salary of at least $1,128 per week or $58,656 per year, or workers in certain occupational roles.
Additionally, the IRS said it’s in the process of updating income tax forms and instructions for taxpayers to use this filing season that will assist them in claiming these deductions.
The start date of the filing season for the 2025 tax year is yet to be announced, though it has been late January in recent years.
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