What to know -- and what isn't known yet -- about US tax deductions for tips and overtime pay

Globe and Mail

10-07-2025

Millions of U.S. workers who earn tips and overtime pay may be eligible for a federal tax break when they file their 2025 income taxes next year.
But which workers will qualify for the new deductions is among the details the government has to work out after President Donald Trump's signature spending and policy package won final congressional approval.
Under the bill Trump signed into law on July 4, the U.S. Treasury Department must publish a list by Oct. 2 of occupations that qualify for tax-free tips. The department is also expected to publish guidance on how to report tips and overtime pay, and what documentation will be required.
The deduction provisions are not permanent but were written to expire after the 2028 tax year.
Overtime pay isn't currently separated out on an employee's W-2 tax form, for example, but employers generally keep track of it and itemize it on employees' pay stubs, said Miguel Burgos, a certified public accountant with TurboTax.
Employers should continue to withhold taxes while waiting for guidance, Burgos said. The bill doesn't apply to state and local taxes or to federal payroll taxes, which help fund Social Security and Medicare.
Here's what we know about tax-free tips and overtime:
Who is expected to qualify for tax-free tips?
The bill says eligible workers are those who already regularly received tips before December 2024. In the restaurant industry alone, there are 2.1 million tipped servers and bartenders, according to the National Restaurant Association.
Barbers, hairdressers, nail technicians and delivery drivers are also expected to be included. Workers must include a Social Security number when they file their taxes to be eligible, and a spouse's Social Security number if they're married and filing jointly.
How much will eligible workers be able to deduct?
Workers will be able to deduct up to $25,000 in tips if they make less than $150,000 (or $300,000 if they're married and filing jointly). The amount workers can deduct is reduced by $100 for every $1,000 they make over $150,000.
Who will see the most benefit from not paying federal taxes on tips?
The change will not affect around 40% of tipped workers since they already pay little to no income tax, according to the nonpartisan Tax Policy Center. The other 60% of tipped workers are expected to see an average tax cut of $1,800 per year.
What kinds of tips will be counted?
Both cash tips and credit cards are included. Tips pooled together and then distributed to a restaurant's employees are also included, although servers may be less inclined to participate in tip pooling now that they are eligible for a tax deduction. Service charges – such as an automatic gratuity for a large party – aren't included because the bill makes clear that eligible tips must be 'paid voluntarily.'
Who will be eligible for tax-free overtime?
The Budget Lab at Yale estimates that 8% of U.S. hourly workers and 4% of salaried workers are regularly paid overtime under the Fair Labor Standards Act, which requires overtime pay of at least time and a half once employees have worked 40 hours in a week. People working in many jobs, including clergy, teachers and executives, are exempt from federal overtime rules.
How much in overtime can workers deduct from their federal taxes?
Workers can deduct up to $12,500 in overtime (or up to $25,000 in a joint return). Like the tip measure, the amount workers can deduct is reduced if they make more than $150,000. And they must include a Social Security number when they file.
How much of a tax cut is an overtime deduction likely to yield?
The average worker is expected to see a tax cut of between $1,400 and $1,750 per year, according to the White House Council of Economic Advisers.
According to an analysis by the nonpartisan Joint Committee on Taxation, tax-free tips would reduce federal revenue by $31 billion between the 2026 and 2029 fiscal years, while tax-free overtime would reduce federal revenue by $90 billion during the same period.