07/19/2025
Overtime and Tips new tax break:
Under the new law, workers will still pay taxes on overtime pay throughout the year, but they may qualify for a deduction when filing their federal income tax return.
Overtime pay eligible for new tax deduction: From 2025 through 2028, single filers can deduct up to $12,500 of overtime pay, and married couples filing jointly can deduct up to $25,000.
Under the Fair Labor Standards Act of 1938, employees who work more than 40 hours per week are typically entitled to time and a half for each additional hour worked. Like regular wages, overtime pay is generally taxable. Under the new law, workers will still pay taxes on overtime pay throughout the year, but they may qualify for a deduction when filing their federal income tax return.
The deduction is available regardless of whether the taxpayer itemizes their deductions or chooses the standard deduction. In order to qualify for the deduction, the taxpayer must provide a valid Social Security number.
Both the tip income and overtime pay deductions operate in the same way: Taxpayers can reduce their taxable income as long as their MAGI is below $150,000 ($300,000 if married filing jointly). For taxpayers whose income exceeds these thresholds, the deductions will begin to phase out.
“This is a big [tax break] for working-class earners,” Miller says. “If you rely on tips or are working extra hours, now’s the time to capitalize on this break.”
Tipped workers can deduct up to $25,000 from taxable income
Currently, tip income is taxable and workers who receive it are required to report and pay taxes on those earnings during the year. However, beginning in 2025, taxpayers can deduct up to $25,000 of tip income when they file their federal income tax return.
The new tax benefit is available whether a taxpayer itemizes or takes the standard deduction, and is in effect from 2025 through 2028.
To qualify, a taxpayer’s MAGI must not exceed $150,000 for single filers or $300,000 for married filing jointly couples.
The new bill not only extends the deduction to employees but also to independent contractors and business owners who receive tips as part of their operations. However, to qualify, their gross income (including tips) must exceed their business expenses, not including the tip deduction itself.
For example, a freelancer who earns $55,000 in 2025 — including qualifying tips — and has $20,000 in business expenses (excluding the tip deduction) would be eligible to claim the deduction, since their gross income exceeds their expenses.
