What to know about Trump’s ‘no tax on tips’ as IRS releases new guidance on overtime rules

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The Internal Revenue Service (IRS) has issued guidance for the “no tax on tips” and “no tax on overtime” provisions of the One Big Beautiful Bill Act (OBBBA) for workers eligible to claim deductions for the 2025 tax year.

The OBBBA was signed into law by President Donald Trump in July following a party-line vote by Republican majorities in Congress on a tax reform and spending bill earlier that summer.

The legislation includes provisions for “no tax on tips” and “no tax on overtime,” with the Treasury Department and IRS now offering guidance as mandated by the law to help workers determine their deductions.

According to the IRS notice, taxpayers eligible to claim deductions for tipped and overtime income may need to calculate these amounts separately this year, as Form W-2 and Form 1099 will not be updated to include tip and overtime income for the 2025 tax year.

Taxpayers can refer to examples in the IRS guidance to understand how the tipped income and overtime deductions function based on the income they received.

Under the OBBBA, workers who receive qualified tips can deduct up to an annual maximum of $25,000, with the deduction gradually phasing out for taxpayers with a modified adjusted gross income over $150,000 (or $300,000 for joint filers).

The IRS estimates that approximately 6 million workers report tipped wages, and the tipped income deduction will apply for tax years 2025 to 2028.

The IRS has provided guidance on the deductions under the One Big Beautiful Bill Act (OBBBA) for the 2025 tax year related to President Trump’s “no tax on tips” and “no tax on overtime” policy.

The “no tax on overtime” provision enables individuals who receive qualifying overtime compensation to deduct the pay exceeding their regular pay – typically the “half” portion of “time and a half” overtime pay – as reported on Form W-2, Form 1099, or other specified statements.

The maximum annual deduction is $12,500 (or $25,000 for joint filers), with the deduction phasing out for taxpayers with a modified adjusted gross income over $150,000 (or $300,000 for joint filers). Notably, this deduction is available for both itemizing and non-itemizing taxpayers.

The Fair Labor Standards Act mandates that most employees must receive at least the federal minimum wage for all hours worked and overtime pay at a rate of at least time and a half for working beyond 40 hours per week.