No Tax on Tips and Overtime: What Employers & Employees Need to Know

The new federal tax law just delivered a big win for America’s workers:

No Tax on Tips

• Employees in tipped occupations (servers, bartenders, rideshare drivers, etc.) can deduct up to $25,000 in reported tips from their taxable income.

• Applies to tax years 2025–2028.

• Phase-out starts for individuals earning over $150K ($300K for joint filers).

• Tips still need to be reported to employers—this isn’t a “free pass” to skip tip reporting.

 No Tax on Overtime

• Employees can also deduct the “premium” portion of overtime (the extra half-time above regular wages).

• Deduction capped at $12,500 ($25K for joint filers).

• Only applies to FLSA overtime (hours worked over 40 in a week).

 Key Dates

• Retroactive to Jan 1, 2025—employees can claim deductions next tax season.

• Expires after 2028, unless extended by Congress. 

What This Means for You

• Employees: Bigger paychecks and lower tax bills, especially in hospitality, healthcare, and retail.

• Employers: Payroll systems will need updates to track and report tips/overtime separately on W‑2s.

 Bottom Line: This is major tax relief for tipped and hourly workers—but compliance will be key. Start preparing now for changes coming in 2025.

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