On July 4, 2025, President Trump signed the One Big Beautiful Bill (OBBB) Act into law. The OBBB Act includes dozens of tax changes affecting individuals and businesses, including new provisions promised by President Trump during his 2024 campaign related to tips and overtime pay.
Qualified Tips Deduction
Under the OBBB Act, individuals can claim an income tax deduction for qualified tips received in tax years 2025 through 2028. A “qualified tip” is any cash tip received in an occupation which customarily and regularly received tips on or before December 31, 2024.
The deduction is limited to $25,000 per tax year, and starts to phase out when modified adjusted gross income (AGI) is above $150,000 ($300,000 for joint filers). The allowable qualified tip deduction amount phases out completely when the taxpayer’s modified AGI reaches $400,000 ($550,000 for joint filers).
Amounts that do not meet certain requirements are excluded from qualified tip treatment. The deduction is not allowed unless the taxpayer‘s social security number appears on his or her income tax return. Married taxpayers must file a joint return to claim the deduction. Qualified tips received in the course of a nonemployee individual‘s trade or business are deductible only to the extent that gross receipts are greater than allocable deductions.
Reporting Requirements. Under the OBBB Act, the Treasury Secretary (or his delegate) is required to modify the procedures for income tax withholding on wages for tax years beginning after December 31, 2025, to account for the qualified tips deduction. An employer must report qualified tips on the employee‘s Form W-2, or the employee must report the tips on Form 4137, Social Security and Medicare Tax On Unreported Tip Income. A service recipient must report qualified tips on the nonemployee payee‘s Form 1099-NEC or Form 1099-K.
Caution Note
The qualified tips deduction and overtime pay deduction are income tax deductions. The amounts deducted are still subject to Federal Insurance Contributions Act (FICA) tax (or to the Federal Unemployment Tax Act (FUTA) tax imposed on employers) under the federal employment tax rules.
Qualified Overtime Pay Deduction
Under the OBBB Act, individuals can claim an income tax deduction for qualified overtime pay received in tax years 2025 through 2028. The deduction is limited to $12,500 per tax year ($25,000 per tax year for joint filers), and starts to phase out when modified AGI is over $150,000 ($300,000 for joint filers). The allowable qualified overtime pay deduction amount phases out completely when the taxpayer’s modified AGI reaches $275,000 ($550,000 for joint filers).
“Qualified overtime compensation” is overtime paid to an individual required under the Fair Labor Standards Act of 1938 (FLSA) that is in excess of the regular rate under the FLSA at which the individual is employed. Under the FLSA, employers generally must pay covered, nonexempt employees at least one-and-a half times their regular rate of pay for hours worked over 40 hours a week at a given job. The “regular rate” of pay generally includes all remuneration for employment paid to the employee, but certain types of payments are excluded.
Reporting requirements. Qualified overtime pay must be included on the employee’s Form W-2, or the nonemployee’s Form 1099-NEC. In the case of qualified overtime compensation required to be reported for periods before January 1, 2026, persons required to file returns or statements may approximate a separate accounting of amounts designated as qualified overtime compensation by any reasonable method specified by the Secretary.
The overtime pay deduction is not allowed unless the individual’s social security number appears on his or her income tax return. Married taxpayers filing separately are not eligible.
Contact Us
Please contact our team if you would like to discuss how you might benefit from the qualified tips or overtime pay deductions available under the OBBB Act. We are here to assist.
