No Tax on Tips & Overtime: A Deep Dive into the 2025–2028 IRS Deductions
Updated for the 2025 tax year — what tipped workers and self-employed service providers need to know.
For 2025 through 2028, the IRS has introduced two powerful new above-the-line deductions under the One Big Beautiful Bill Act (OBBBA) that can directly reduce your taxable income:
✅ Qualified Tips Deduction – up to $25,000 annually
✅ Qualified Overtime Deduction – up to $12,500 annually (or $25,000 for joint filers)
These deductions are available to both employees and self-employed individuals — but only if certain rules are met. States and payroll taxes still apply, and these breaks phase out for higher-income taxpayers. IRS+1
Below, we break down how they work, who qualifies, and real-world examples of both employee and self-employed situations.
What Counts as “Qualified Tips”?
To claim the qualified tips deduction:
You must work in an occupation that customarily and regularly received tips before Dec. 31, 2024.
Tips must be voluntary and not mandatory service charges.
Tips can be cash, credit card, or other cash equivalents.
Tipped income must be reported on Form W-2, Form 1099, or directly reported by you (e.g., via Form 4137). IRS+1
Self-employed service providers (e.g., tour guides, freelance bartenders) can claim tips they report on a 1099-NEC or on their Schedule C, as long as the work fits the IRS’s eligible occupation definitions and reporting requirements. IRS
👉 Official IRS List of Eligible Occupations
The IRS and Treasury have published guidance on occupations that “customarily and regularly” receive tips — nearly 70 job types across sectors like food service, hospitality, entertainment, personal services, and transportation. You can view the preliminary list from the IRS here:
🔗 Occupations That Customarily and Regularly Received Tips (Treasury PDF) – https://home.treasury.gov/system/files/136/Tipped-Occupations-Detailed-8-27-2025.pdf U.S. Department of the Treasury
Qualified Overtime: What You Need to Know
The overtime deduction applies to the portion of your pay that is above your regular hourly rate — generally the “half-time” premium in time-and-a-half overtime required under the Fair Labor Standards Act (FLSA). Blog
For example:
If your regular rate is $20/hour and you work 50 hours in a week, standard overtime pay under FLSA is $30/hour for the 10 overtime hours. The qualified overtime portion eligible for deduction is the extra $10/hour for those overtime hours.
🧮 Calculation Example — Overtime:
10 OT hours × $10 qualified premium = $100 deductible overtime for the week.
To qualify for the IRS deduction:
You must show that overtime was paid as required by FLSA; excess overtime beyond FLSA minimums may not qualify.
Employers may not yet list qualified overtime separately on Forms W-2 for 2025, so you may need to reconstruct it from pay records. TaxAct Blog
Example: Server With Mixed Earnings
Let’s look at a multi-layered scenario to show how this works:
Maria’s 2025 Income
W-2 Wage Income: $40,000
Tips Reported on W-2 & 4137: $22,000
Overtime Pay (half-time premium): $9,000
MAGI: $68,000
Eligible Deductions
✔ Qualified Tips Deduction: Up to $22,000
✔ Qualified Overtime Deduction: Up to $9,000
Self-Employed Scenario: Freelance Tour Guide With Tips
Now consider Tom, a self-employed tour guide who receives tips from customers.
Tom’s 2025 Income
1099-NEC Income from Tours: $36,000
Tips Reported on Schedule C: $18,000
Business Expenses: $12,000
Net Self-Employment Income: $42,000
Because Tom:
Is self-employed in an occupation that customarily received tips, and
Reports his tips on Schedule C / 1099-NEC, he may claim them as qualified tips for the deduction — just like an employee. IRS+1
If his MAGI is below the phase-out threshold, Tom could deduct up to $18,000 of those tips — reducing his net taxable income and overall tax liability.
Important Note: Tips are still subject to self-employment tax, just as they would be for payroll taxes with employees.
Phaseouts, Limitations & Filing
Income Phaseouts
Deduction phases out for single filers with modified AGI over $150,000
For married filing jointly, phase-out begins at $300,000 IRS
State & Payroll Taxes Still Apply
While federal income tax on these earnings can be reduced, Social Security and Medicare taxes (FICA) still apply, and many states may not mirror these deductions.
Reporting in 2025
The IRS has provided transitional guidance that employers may not separately report qualified tips or overtime on W-2s for 2025, so taxpayers may need to reconstruct figures from pay stubs, employer statements, or tip logs. IRS
How to Prepare Before Filing
✔ Keep meticulous tip logs — including dates, amounts, and whether tips were voluntary
✔ Save pay statements showing overtime hours and pay rates
✔ For self-employed income, ensure tips are clearly reported on Schedule C or 1099-NEC
✔ Consult a tax professional to ensure calculations and documentation support your deductions
In Summary
The new “No Tax on Tips” and “No Tax on Overtime” deductions are among the most significant changes for working Americans and self-employed service providers in years. If you work in an eligible occupation and receive tips or overtime, you could lower your 2025 taxable income by thousands — but it takes careful documentation and smart planning to maximize the benefit.
👉 See the official IRS list of occupations that qualify for the tip deduction:
https://home.treasury.gov/system/files/136/Tipped-Occupations-Detailed-8-27-2025.pdf U.S. Department of the Treasury