What Does No Taxes on Overtime or Tips Through 2028 Mean for Workers?
The recently signed “One Big Beautiful Bill Act” (OBBBA) has brought significant changes to how certain workers will handle their federal taxes. Among its most notable provisions are new federal income tax deductions for qualified tips and overtime pay that will remain in effect through 2028. These changes have generated considerable attention, particularly the promise of no taxes on overtime and no taxes on tips.
However, these provisions come with important nuances that workers need to understand. While the legislation provides meaningful tax relief, it’s crucial to recognize that these are deductions rather than complete exemptions from all taxes. Social Security, Medicare, and applicable state and local taxes will still apply to this income.
For workers in tip-based industries and those who regularly earn overtime compensation, understanding these new rules could result in substantial tax savings. The overtime pay attorneys at Barrett & Farahany will explore what these changes mean for your paycheck and tax obligations.
Understanding the “One Big Beautiful Bill Act” (OBBBA)
The OBBBA introduces targeted federal income tax relief for specific types of worker compensation. The legislation recognizes that tips and overtime pay represent additional income that workers earn through extended hours or exceptional service, and it aims to reduce the federal tax burden on these earnings.
These provisions specifically create deductions that reduce your federal taxable income, not complete tax exemptions. This means qualified tips and overtime income will still appear on your tax return, but can be deducted when calculating your federal income tax liability. The deductions operate similarly to other tax deductions you might claim, reducing the amount of income subject to federal taxation.
The legislation includes phase-out provisions based on income levels, ensuring that the benefits primarily target middle and lower-income workers who rely on tips and overtime as essential parts of their compensation.
Tip Tax Relief: What Workers Need to Know
Federal Income Tax Deduction for Tips
Under the new legislation, eligible workers can deduct up to $25,000 of qualified tips from their federal taxable income each year from 2025 through 2028. This overtime tax exemption represents a significant benefit for workers in tip-dependent industries who previously paid full federal income tax on all tip income.
Eligibility Requirements
The tip tax relief applies specifically to workers in occupations that customarily receive tips as of December 31, 2024. The IRS will provide a comprehensive list of qualifying occupations by October 2, 2025, which should clarify exactly which workers can benefit from these worker tax benefits.
Qualified tips under the legislation include voluntary payments from customers and income received through tip-sharing arrangements. However, mandatory service charges added to bills do not qualify for the deduction, as these are considered regular wages rather than tips.
Income Limitations and Phase-Out
The deduction phases out for workers with higher incomes. If your modified adjusted gross income exceeds $150,000 ($300,000 for married couples filing jointly), the deduction amount will be reduced. This ensures that the benefit primarily helps workers who depend on tip income rather than high earners who might receive occasional tips.
Ongoing Tax Obligations
Despite this federal income tax relief, workers must continue reporting all tip income to their employers. Tips remain subject to Social Security and Medicare taxes, and employers will have new reporting requirements to identify qualified tip income separately on Form W-2 statements.
Overtime Tax Deductions: Understanding Your Benefits
Federal Income Tax Relief for Overtime
The legislation also provides federal income tax deductions for qualified overtime compensation. Eligible workers can deduct up to $12,500 ($25,000 for married couples filing jointly) of qualified overtime pay from their federal taxable income for tax years 2025 through 2028.
Defining Qualified Overtime
The overtime tax exemption applies specifically to the premium portion of overtime pay required under the federal Fair Labor Standards Act (FLSA). This means only the additional 50% of your regular hourly wage that you receive for overtime hours qualifies for the deduction.
Overtime pay that results from state laws, collective bargaining agreements, or voluntary employer policies beyond FLSA requirements does not qualify for this federal deduction. The legislation focuses specifically on federally mandated overtime premiums.
Income Limitations
Like the tip deduction, the overtime deduction phases out for individuals with modified adjusted gross income exceeding $150,000 ($300,000 for joint filers). This structure ensures that the primary beneficiaries are workers who depend on overtime income to meet their financial needs.
Continued Tax Responsibilities
Overtime wages remain subject to Social Security and Medicare taxes. Employers must identify qualified overtime compensation separately on Form W-2 statements, helping workers and tax preparers accurately claim the deduction.
Taking Action to Protect Your Compensation
If you are considering legal action against your employer for overtime violations, it is important to speak with an attorney sooner rather than later. Barrett & Farahany understands the federal wage and overtime rules and will discuss your options with you to decide the right course of action.
The new tax provisions provide valuable benefits for workers, but they cannot replace the fundamental right to receive proper compensation for your work. Whether you’re dealing with unpaid overtime, tip pooling violations, or other wage and hour issues, experienced legal representation can help you recover the compensation you’ve earned and deserve.
Contact us today to schedule a consultation and learn more about how we can help protect your rights as a worker.
