Two major tax changes could significantly impact your 2025 tax return: No Tax on Tips and No Tax on Overtime.

Both were introduced under the One Big Beautiful Bill Act (OBBBA) passed on July 4, 2025, and they represent some of the most meaningful tax relief measures for employees in years.

While these changes sound simple, there are important details and gray areas that both workers and employers should understand.

Let’s walk through what these tax breaks mean, who qualifies, and what steps you should take now to prepare.

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How Much You Can Deduct

1. No Tax on Tips

You can deduct up to $25,000 in qualified tips from your federal taxable income.

• The deduction begins to phase out above $150,000 for single filers and $300,000 for joint filers.

This means servers, bartenders, and anyone else who regularly receives tips could see a major reduction in taxable income.

However, the IRS has not yet finalized what types of tips and occupations will qualify. Until further guidance is released, there is still some uncertainty.

2. No Tax on Overtime

You can also deduct up to $12,500 in qualified overtime pay from your taxable income, or $25,000 for joint filers.
This deduction also phases out above $150,000 ($300,000 for joint filers).

The law follows the Department of Labor’s definition of overtime: working more than 40 hours in a single workweek for non-exempt employees.

However, this deduction only applies to the overtime portion of pay (the “half” in time-and-a-half).

What’s less clear is how bonuses, comp time, or other alternative pay structures will be handled under this new rule. We expect more clarification from the IRS in the coming months.

Who Qualifies

It is obvious that tipped professions like restaurant servers, bartenders, and hospitality workers qualify for the tip deduction.

But what about others who occasionally receive tips, such as hairstylists, barbers, or delivery drivers?

The IRS is mandated under the OBBBA to provide a detailed list of qualifying professions and acceptable forms of tip income. Until that list is published, taxpayers will need to rely on documentation and consistent reporting.

For the overtime deduction, most hourly workers and non-exempt employees qualify.
However, if you receive overtime through a bonus system or comp time, the rules may be more complicated.

Employers should work with payroll specialists and tax advisors to ensure that reporting systems can separate regular pay from eligible overtime pay.

Reporting Is Key

This is where things could get messy.

Employers must separately report qualified tips and overtime on employee Form W-2s or contractor Form 1099s.

The problem?

• 1099s currently do not have a dedicated box for tips.
• Neither W-2s nor 1099s currently have a space to report overtime pay.

Additionally, while the OBBBA provides a federal income tax deduction, tips and overtime are still subject to other taxes, including:

• Social Security tax
• Medicare tax
• State income taxes

This means employers must now distinguish between income that is:

1. Fully taxable, and
2. Income that is exempt from federal income tax but still subject to other withholdings.

For detailed withholding guidance, see the IRS Employer’s Tax Guide (Publication 15)

2025 Is a Transition Year

Because of the complexity, the OBBBA allows 2025 to be a transition year.
This means employers will not be required to report tax-free income on redesigned W-2s or 1099s until 2026.

That’s good news, since 2025 payroll forms have already been approved and distributed to software providers and printers.

This transition period gives employers time to:

• Adjust payroll systems
• Train HR and accounting staff
• Create internal procedures for tracking qualifying tips and overtime

What Employees Should Do Now

Until the IRS releases its official guidance (expected by October 2025), workers should:

1. Track all tips and overtime income starting from January 2025.
2. Save documentation such as pay stubs, shift logs, or receipts that prove the amount earned.
3. Check your pay stubs to see whether tips and overtime are listed separately. If not, ask your employer how they plan to report them.
4. Keep everything organized in case the IRS requests proof at tax time.

Preparation now can make a major difference when you file your 2025 return.

What Employers Should Do

Businesses should also begin preparing for these changes:

• Coordinate with payroll providers to ensure accurate reporting.
• Separate qualified tip and overtime income in their accounting systems.
• Communicate early with employees about what will be tracked and how it will appear on pay statements.
• Consult a tax strategist or CPA to confirm compliance and avoid potential penalties.

Bement Company’s Strategy team can help businesses design tax-efficient reporting systems that keep them compliant and ready for 2026.

Final Thoughts

The No Tax on Tips and No Tax on Overtime deductions could deliver meaningful savings for both workers and employers, but only if they are tracked and reported correctly.

Until the IRS provides its final guidance later this year, staying organized is your best strategy.

Keep your records, monitor how your income is reported, and stay tuned for updates.

If you want to understand how these new deductions might impact your business or your personal taxes, schedule a strategy session with Bement Company.