Taxpayers who receive tips or overtime pay may qualify for the new income tax deductions brought on by the One Big Beautiful Bill Act (OBBBA) for tax years 2025 through 2028. Since employers aren’t required to provide detailed information on tips income or overtime compensation until the 2026 tax year, the IRS has issued guidance for workers eligible to claim the deduction for 2025.

Our tax pros provide an overview of what individuals need to know, including how to determine eligibility and how big the deduction might be.  

The New Deductions for Tips and Overtime Pay 

Rather than eliminating taxes on all tips income and overtime compensation, the OBBBA establishes partial deductions available to both itemizers and nonitemizers, subject to income-based limitations. Qualified tips income and overtime compensation remain subject to federal payroll taxes and state income and payroll taxes, where applicable. Moreover, because the tax breaks are in the form of deductions claimed at tax time, employers must continue to withhold federal income taxes from employees’ paychecks.

For qualified tips, workers may be able to claim a deduction of up to $25,000. “Qualified tips” generally refers to cash tips received by an individual in an occupation that customarily and regularly received tips on or before Dec. 31, 2024. The tips must be paid voluntarily, without any consequence for nonpayment, in an amount determined by the payor and without negotiation.

Proposed IRS regulations identify 68 eligible occupations within the following categories:

• Beverage and food service
• Entertainment and events
• Hospitality and guest services
• Home services
• Personal services
• Personal appearance and wellness
• Recreation and instruction
• Transportation and delivery

The tips deduction begins to phase out if your modified adjusted gross income (MAGI) exceeds $150,000, or $300,000 if you’re married filing jointly. The deduction is completely phased out if your MAGI reaches $400,000, or $550,000 if you’re a joint filer.

The overtime deduction is limited to $12,500, or $25,000 if you’re a joint filer. A phaseout begins if your MAGI exceeds $150,000, or $300,000 if you’re a joint filer. The deduction is completely phased out if your MAGI reaches $275,000, or $550,000 if you’re a joint filer.

The overtime deduction is available for overtime pay required by the Fair Labor Standards Act (FLSA), which generally mandates “time-and-a-half” for hours that exceed 40 in a workweek. Notably, though, the deduction applies only to the pay that exceeds the regular pay rate — that is, the “half” component. 

Because the FLSA definition of overtime varies from some state law definitions, overtime pay under state law might not be deductible. And the deduction doesn’t apply to overtime paid under a collective bargaining agreement or that an employer pays in excess of time-and-a-half (for example, double-time).

Tips Deduction Calculation

Employers won’t be required to include the total amount of cash tips reported by the employee and the employee’s occupation code on Form W-2 until the 2026 tax year. For 2025, workers can calculate their tips deduction using: 

• Social Security tips reported in Box 7 of Form W-2.
• The total amount of tips you reported to your employer on Forms 4070, “Employee’s Report of Tips to Employer,” or similar forms, or
• The total amount of tips your employer voluntarily reports in Box 14 (“Other”) of Form W-2 or a separate statement.

Workers may also include any amount listed on Line 4 of the 2025 Form 4137, “Social Security and Medicare Tax on Unreported Tip Income,” filed with your 2025 income tax return (and included as income on that return). Note, workers are responsible for determining whether the tips were received as part of an eligible occupation. If an employer opts to provide this or other relevant information in Box 14 (“Other”) of Form W-2, workers may rely on it.

Tips also won’t be required to be reported on Forms 1099 until the 2026 tax year. For 2025, if you’re an independent contractor, you can corroborate the calculation of your qualified tips with:

• Earnings statements
• Receipts
• Point-of-sale system reports
• Daily tip logs
• Third-party settlement organization records
• Other documentary evidence

Note: Nonemployees must confirm their tips were received from an eligible occupation.

Overtime Deduction Calculation

Employers won’t be required to include eligible overtime pay on Form W-2 until the 2026 tax year. For 2025, workers can self-report your overtime compensation for the overtime deduction. 

According to the IRS, workers must make a “reasonable effort” to determine whether they’re considered to be an FLSA-eligible employee. The IRS says this may include asking your employers or other service recipients about your FLSA status.

To calculate the deduction amount, workers must use “reasonable methods” to break out the amount of overtime pay that qualifies. For example, if a worker was paid time-and-a-half and receive a statement with the total amount for overtime (regular wages plus the overtime premium), then they can use one-third of the total. If a worker was paid double-time and receive such a statement, they can multiply the total dollar amount by one-fourth to compute the qualifying overtime pay.

Evaluate Your Savings Opportunity

If you might be eligible for the tips or overtime deduction, don’t miss out on this tax-saving opportunity just because your deduction may be difficult to calculate. Our tax pros are here to help, whether you’re an employer fielding questions from employees or in need of assistance with reporting requirements for 2026, or an individual seeing guidance for their 2025 return.