No taxes on overtime or tips? What the new proposal could mean for your paycheck

A new law called the One Big Beautiful Bill Act (OBBBA) was passed. It helps former President Trump fulfill two campaign promises: No taxes on overtime and No taxes on tips. These tax breaks start from January 2025 and end after 2028. This law affects both workers and business owners, as per the reports.

No tax on overtime pay

You don’t have to pay income tax on some of your overtime money. You can deduct up to $12,500 if you’re single, or $25,000 if you file taxes as a couple. If you earn more than $150,000 (single) or $300,000 (married), this benefit goes away, as per the report by NAHB.

You don’t have to do itemized deductions to get this — it's automatic. This only works on extra money you earn from overtime, not your regular pay. Example: If your normal pay is $20/hour and you earn $30/hour for overtime, only the extra $10/hour counts for the tax break, as per the reports.


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Only legal overtime under federal law (over 40 hours/week) is allowed. Overtime paid through contracts or state law doesn't count unless it also follows federal rules. You still pay Social Security and Medicare taxes on overtime pay, as stated by the NAHB report.

How employers must report overtime

Employers must show the overtime amount separately on your W-2 form. Right now, overtime and regular pay are combined on W-2, but this will change in 2025. For 2025, employers can use a “reasonable guess” to separate regular and overtime pay while adjusting to the new rule, as per the reports.

The IRS will give more instructions about how to report this soon. Employers are told to work with accountants or payroll experts to track overtime correctly.

No tax on tips

Workers who get tips can also avoid paying income tax on some of their tip money. You can deduct up to $25,000 in tips from your taxable income. This benefit also phases out if you earn over $150,000 (single) or $300,000 (married). You don’t need to itemize to get the tip deduction — it’s automatic, as stated by the NAHB report.

To qualify, you must work in a job that normally gets tips, like waiters, repair workers, etc. The Treasury Department will release a list of approved “tipped jobs” by around October 2025. Tips must be given freely by the customer — mandatory service charges don’t count, as per the reports.

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Who can't use the tip deduction

Some jobs can’t use the tip deduction, even if they get tips.

These include people working in

• Law

• Medicine

• Accounting

• Consulting

• Finance

• Performing arts

• Athletics

• Investing

• Stock trading

• Any job based mainly on the person's skill or fame

How employers must report tips

Tips will also need to be reported separately on your W-2 form. In 2025, employers can use a reasonable method to estimate tip amounts while the system updates. Just like overtime, you still pay Social Security and Medicare taxes on tips, as mentioned by the NAHB report.

NAHB says this is just general information — not legal or tax advice. Before doing anything, you should talk to a real tax or accounting expert.

FAQs

Q1. Will I pay tax on my overtime pay in 2025?
No, under the OBBBA law, qualified workers can deduct up to $12,500 (single) or $25,000 (married) of overtime pay from their taxable income starting in 2025.

Q2. Are tips still taxed under the new 2025 rule?
Tips are still subject to payroll taxes, but eligible workers can deduct up to $25,000 in tip income from federal income tax under the new OBBBA law.