Article

Tactical tips on taxing tips (and overtime)

An overview of the OBBBA exemption on tips

Dec. 3, 2025 · Authored by Andrew Whitehair, Zev Weinstein, Krissa Lietz

While on the campaign trail, President Trump promised to eliminate taxes on tips. The enactment of the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21) is the first step to fulfilling the president’s promise. The OBBBA introduced a temporary federal income tax exemption on tips and overtime.

Here are five things to know about this new exemption:

1. Tip talk

Chapter two 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 deduction. The IRS issued proposed regulations on Sept. 22, 2025, listing occupations that are eligible for the provision and include occupations in the food and drink services, ride-share drivers, beauty industries and other service-based professions. Note that the deduction is not available for workers tied to section 199A Specified Service Trades or Businesses which include industries such as healthcare, legal and performing arts. The tips must also be reported on IRS-approved forms, such as Form W-2, 1099-NEC, 1099-K and 4137 for them to be deductible.

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, that is 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, meaning, only half the portion of time and a half.