07/05/2025
There is a lot of misinformation currently on social media about the tips and overtime tax deduction. This is a legitimate deduction in the One Big Beautiful Bill Act (OBBB) that will result in lower taxes. Here's how it's going to work.
It goes into effect as of December 31, 2024. That means this year, withholding tables are taxing all income including tips and overtime. The true up will happen next spring when you file your 2025 income tax return and people will get a refund of any excess withholding.
The deductions are as follows:
- Up to $25,000 for tips
- Up to $12,500 for overtime
The deduction will be subtracted from adjusted gross income (AGI). You do not have to itemize to get it. There is a phase out that begins when a AGI exceeds $150,000 (single) and $300,000 (MFJ).
Tips DO NOT have to be cash only. Cash tips is defined in the legislation as "paid in cash or charged and, in the case of an employee, tips received under any tip sharing arrangement." Translation: all tips received and reported.
The tip deduction is only available for W-2 employees (not self employed or gig workers) for the following services:
- providing, delivering, or serving of food or beverages for consumption
- providing of any of the following services to a customer
(i) Barbering and hair care.
(ii) Nail care.
(iii) Esthetics.
(iv) Body and spa treatments
Employers will have to break out tax and tips, presumably in box 14 of the W-2.
IRS withholding tables will be updated in 2026 to exclude tips and overtime from federal income tax withholding. You will still have withholding for Social Security & Medicare (F**A) and state income tax withholding if you have a state income tax.
Tax rates are not changing. This legislation makes the current tax rates (changed in 2018 under President Trump's first term) permanent. Tax brackets are 10%, 12%, 22%, 24%, 32%, 35%.
If you are in the 12% tax bracket and get the deductions, this is approximately how much maximum tax you may save:
tips - up to $3,000
overtime - up to $1,500
If you are in the 22% tax bracket and get the deductions, this is approximately how much maximum tax you may save:
tips - up to $5,500
overtime - up to $2,750
If you are in the 24% tax bracket and get the deductions, this is approximately how much maximum tax you may save:
tips - up to $6,000
overtime - up to $3,000
The higher two tax brackets have phased out AGI so no tax savings in those brackets.
These deductions are temporary and terminate on December 31, 2028.
