Personal Finance·TaxesThe rules for paying taxes on tips and overtime are changing thanks to Trump’s Big Beautiful Bill.
Here’s what to expectBY Alicia AdamczykBY Alicia AdamczykSenior WriterAlicia AdamczykSenior WriterAlicia Adamczyk is a New York City-based senior writer at Fortune, covering personal finance, and retirement.
SEE FULL BIO Tax experts say there are a few nuances of the no tax on tips and overtime law that workers should know ahead of next tax season.
Grace CaryPresident Donald Trump’s campaign mises to end taxes on tips and overtime pay have seemingly come to fruition in the GOP’s “One Big Beautiful Bill” that became law Friday.
But tax experts say there are a few nuances of the law workers should know ahead of next tax season.
Both visions have the potential to be worth thousands of dollars, depending on the individual taxpayer’s situation and how much they earn.
That fact is music to the ears of workers who are struggling to pay higher prices for just everything.
But there is also the possibility they could cause tension among employees at the same company who could now be taxed differently, undermining tax fairness, says Marc Gerson, member at Miller & Chevalier and former majority tax counsel for the House Ways and Means Committee.
Why should a server in a restaurant, for example, be exempt from paying taxes while a retail worker earning the same amount is not.
The visions “arbitrarily reward some workers over others facing the same financial circumstances,” writes Abir Mandal, senior policy analyst at the right-leaning Tax Foundation.
This, in turn, “disadvantages workers unable to access tipped or overtime-heavy roles, such as those with caregiving responsibilities or fixed schedules.
” Still, they have garnered widespread support among both Democrats and Republicans. Here’s what taxpayers need to know.
No tax on tips explained For tipped workers, the legislation vides an above-the-line deduction for the first $25,000 in tips, meaning they can reduce their federal taxable income by that amount.
Anything over that does not qualify, and this is not a total exclusion from paying taxes—where applicable, workers will still owe state, local, and payroll taxes that go toward Social Security and Medicare.
That said, it could still be worth thousands of dollars a year in federal taxes that tipped workers no longer have to pay.
Exactly what service roles qualify under the legislation is still being hashed out.
It is now up to the Treasury Department and IRS to write the regulations for es and individual taxpayers to, and to list the jobs that qualify for the deduction.
The deduction does phase out for those who earn $150,000, and is available for tax years 2025 through 2028, when Trump leaves office.
To qualify, the service worker—and their spouse, if they have one and file jointly—needs to list a Social Security number, meaning many immigrants and those married to them may not qualify.
“To be a ‘qualified tip’ for purposes of the deduction, the amount must meet certain requirements, including being paid voluntarily and determined by the payer,” says Jennifer Karpchuk, cochair of Holland & Knight’s state and local tax team.
“Therefore, for instance, the deduction may not apply where a restaurant adds a mandated gratuity to the bill for parties over a certain size.
” Because many tipped workers are low-income, almost 40% already don’t pay federal taxes on their tips, says Meg Wheeler, certified public accountant and founder of the Equitable Money ject.
According to the Yale Budget Lab, around 4 million people—or around 2. Workers—are traditionally considered tipped workers.
There is some worry among experts and economists that the policies could encourage some es and workers to change their pay structure to receive more in tips or overtime pay.
Just when Americans are growing more and more fatigued at being asked to tip at seemingly every interaction, this change could supercharge the practice.
Es may also need to rework how they report tipped income on employee tax forms.
Distinguishing between regular wages, tips, overtime, and bonuses adds additional work for employers to absorb, Mandal notes, as well as government revenue departments.
At the same time, it could encourage employers not to raise base wages, he says, further shifting the burden of compensation away from the company.
“It is a win for the owner,” Karla Dennis, a tax strategist, previously told Fortune the policy.
“They may have more of their employees wanting to work the jobs that earn tips, and it may also help to get more people in these service-oriented jobs.
” No tax on overtime explained Those earning overtime pay can deduct up to $12,500 ($25,000 for married couples filing jointly), depending on income.
The tipped income vision, this is available for tax years 2025 through 2028 and phases out for income above $150,000 ($300,000 for couples).
Many of the nuances of the tipped vision also apply here, including that both the taxpayer and their spouse need Social Security numbers to qualify, experts say.
Additionally, overtime deductions only apply to overtime pay as defined by the Fair Labor Standards Act (FLSA) of 1938, says Karpchuk.
“It would not apply to overtime that is not required under the FLSA but is instead paid because of contractual visions or because of more stringent state laws,” she says.
For example, overtime mised under a collective bargaining agreement would fall under a contract, while California has a state law requiring daily overtime for hours worked in excess of eight in one day.
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