Understanding the New “No Tax on Tips” and Overtime Deduction (2025–2028)

The Big Beautiful Bill introduces a major tax change for workers in tipped and service-based industries. For tax years 2025 through 2028, eligible workers may be able to deduct certain tip income and overtime wages from their federal taxable income. This is the first time in many years that tip income may qualify for a federal income tax deduction, offering meaningful relief to millions of workers.

Under the new rules, workers who receive tips in occupations that the IRS recognizes as “customarily and regularly tipped” may deduct up to $25,000 of qualified tips from their taxable income each year. Qualified tips include voluntary tips paid by customers in cash, by credit or debit card, from tip pools, or through electronic payment platforms. Mandatory service charges or automatic gratuities do not qualify as tip income for this deduction.

This deduction is considered an adjustment to income. That means employees may claim it even if they take the standard deduction and do not itemize. The deduction reduces federal taxable income and may result in a lower tax bill or a larger refund. The deduction may phase out for higher-income taxpayers, depending on adjusted gross income levels.

In addition to the tip deduction, the Big Beautiful Bill also includes a temporary “No Tax on Overtime” provision. For the same years, 2025 through 2028, eligible workers may deduct the overtime premium portion of their wages. This refers to the extra pay beyond regular hourly wages that workers receive for working more than standard hours. Like the tip deduction, this reduces federal taxable income and applies whether or not a taxpayer itemizes.

These new deductions do not eliminate the need to report tip income. All tips received must still be reported accurately to employers and on tax returns. Electronic tips will now be captured more consistently through payroll systems, while cash tips must still be reported directly by the employee. The deduction simply allows qualifying workers to subtract eligible amounts from taxable income when filing their federal income taxes.

Employers will be updating their payroll and reporting systems to align with the new rules. Employees may see clearer statements showing regular wages, tip income, overtime pay, and other categories. These records will help ensure accurate reporting at tax time and make it easier to determine how much income qualifies for the new deductions.

It is important for workers to keep their own records of tips received, especially cash tips, even with improved employer tracking. Employees should also save all pay stubs and earnings statements that show tip and overtime amounts. These documents will help tax professionals calculate the correct deduction and confirm eligibility.

The “No Tax on Tips” and “No Tax on Overtime” deductions are temporary tax benefits and are scheduled to end after tax year 2028 unless new legislation extends them. Workers should view these deductions as a short-term opportunity to reduce federal income tax and increase take-home value during the qualifying years.

Tax Pros Inc. is here to help clients understand how these new rules affect their tax filings. Our team can review your pay records, confirm eligibility for the deductions, and ensure you receive the full benefit available under the law.