What You Need to Know Now About New Legislation: No Tax on Tips and No Tax on Overtime

President Donald Trump signed the One Big Beautiful Bill (OBBB) into law on July 4, 2025. It came just one day after the House passed the Senate’s amended version of the bill. It includes specific items that were included in the president’s campaign regarding making tips and overtime non-taxable. These provisions will impact both employees and employers.

“No Tax on Tips” provides employees with a deduction against ordinary income that is capped at $25,000 per year.

The capped deduction is reduced based on the income of the employee. The reduction is equal to $100 for every $1,000 of modified gross adjusted income (MAGI) above $150,000 for a single-filing taxpayer or $300,000 for a joint filer.

Qualified tips are those tipped wages that are paid for by the customer. The customer determines who the tips can go to and the tips cannot be negotiated by the employee. In other words, certain types of payments do not qualify, such as required tips for large parties and service charges.

The qualified tips also require cash or cash equivalent payment, meaning that tips paid by credit card are eligible. Non-cash tips do not qualify. The tips must also be reported with a social security number, meaning the employee must be reporting the tips and those tips are reported as taxable wages. Employers are expected to have additional requirements around W-2 reporting that specifically show the wages subject to tips.

It is important to note that the tips are still subject to various social security tax withholdings and state tax withholdings, where applicable. Employers need to ensure they are running this through their payroll, but that the amount of the tips will be exempt from federal income tax. Employees may be in for a surprise if they look at their pay stubs and see that there is still tax being taken out; it’s not fully free since there will be other taxes taken out.

At this time, the occupations and industries that will allow employees to deduct these wages from their income are not known. It is expected that traditional tip industries and occupations will be applicable; however, the US Treasury has 90 days to publish this list. It’s possible that some tipped workers will be left out depending on their industry or occupation.

Additionally, employers can’t try to shift certain wages into tips in order to try to benefit from this rule. Workers have to be in an occupation that is customarily designed to be tipped as of the end of 2024.

For self-employed individuals, if the tip wage deduction is more than what they make in their trade or business, they cannot deduct more than the income from that business. The impact on the industry could be significant. There is already tip fatigue that may be exacerbated and could negatively impact workers’ ability to earn money. Restaurants that use tips to supplement minimum wage, in states where that is legal, may be required to spend more money if tips drop because of further tip fatigue. On top of that, reporting requirements are already onerous and adding this extra layer will require extra administrative burden.

The part of the bill relating to overtime establishes the following:

At this time, it is unknown how much information will be required to be tracked for reporting purposes. It is also unclear how certain labor contracts or other state law requirements will interact, such as California’s requirement for overtime over eight hours. Employment experts will be needed in this situation to ensure compliance with the FLSA rules.

The bill requires reporting under W-2 for this information or 1099 in the case of a non-employee.

There are transition rules in place for 2025 that may not require an employee to update their W-4 regarding withholding. The employer is able to apply a “reasonable” method to come up with the correct withholdings. Employees should be cautious moving forward to ensure their withholding is not too low based on this change.

Similar to “No Tax on Tips,” Social Security numbers are required to take advantage of this deduction. Qualified tips do not count towards qualified overtime compensation.

FLSA rules apply when coming up with the amount under the qualified compensation definition. There may be limited creativity by employers in structuring compensation to maximize the amounts that can be considered qualified compensation. However, it would be advisable that businesses consult their employment lawyers to ensure they are not running afoul of any rules.

For both provisions, we will watch closely whether states with income tax follow suit with this provision. As both items were just signed into law, we expect more guidance from taxing authorities on how these will be implemented and the trends as we move forward with these provisions. Needless to say, there may be a lot more questions than answers in the short term.