Article

Tactical tips on taxing tips (and overtime)

An overview of the OBBBA exemption on tips 

Aug. 4, 2025 · Authored by Andrew Whitehair, Zev Weinstein, Krissa Lietz

Here are five things to know about this new exemption:

1. Tip talk

Chapter 2 of the OBBBA establishes new below-the-line deductions through 2028 for qualified tip and overtime (OT) income. Taxpayers may deduct up to $25,000 of qualified tip income and up to $12,500 of qualified overtime income ($25,000 for joint filers). There is a phase out component for individuals whose modified adjusted gross income exceeds $150,000 ($300,000 for joint filers). To be eligible for the tax deduction for qualified tip income, individuals must provide a work-eligible Social Security number for themselves and, if married, must file a joint federal tax return.

2. Who benefits?

Occupations that customarily and regularly receive tips prior to 2025 are eligible for the tip tax exclusion. These include occupations in the food and drink services, ride-share drivers, beauty industries and other service-based professions. The Treasury Department, in conjunction with the IRS, is expected to roll out a full list of eligible occupations by the beginning of October 2025.

Tips must be voluntary, non-negotiated and paid by the patron and can be paid by cash or charged. Tips received through tip-sharing or tip-splitting arrangements are also covered. Employer-mandated services charges, however, do not count as qualified tips. These generally are presented as automatic additions to a customer’s bill based on the number of people at a table, holidays or time of day.

For overtime deductions, employees must receive OT pay as defined by the Fair Labor Standards Act (i.e., pay for hours worked beyond 40 in a regular work week). Note that the deduction only applies to the amount paid in excess of their regular hourly rate.

3. Exemption limitations

Notably, federal employment taxes (i.e., Social Security and Medicare), along with possible state and local income taxes, still apply to tip and OT earnings. Additionally, only a