What No Tax on Tips & Overtime Really Means for You
- Zachary Kamish
- Aug 6
- 3 min read
Congress just gave working Americans a reason to smile (besides payday). Under the new One Big Beautiful Bill (OBBB) signed into law on July 4, 2025, two major changes are now in effect:
✅ No federal income tax on tips
✅ No federal income tax on overtime pay
Let’s break down what this means, and how it can impact your wallet.
💰 1. No More Tax on Tips
If you work in a tipped profession—like restaurants, salons, or hospitality—you already know how frustrating it can be to report and be taxed on tips. Under the OBBB, tips you receive from customers will no longer be subject to federal income tax.
What does this mean?
You still report your tips, but they won’t be taxed by the IRS.
This only applies to federal income tax—you may still owe Social Security, Medicare (FICA), and state taxes depending on where you live.
Your take-home pay goes up, especially if tips make up a large portion of your income.
Example: If you earn $200 in tips in a week, that used to be taxed along with your hourly wages. Now, that $200 stays in your pocket (minus any state or FICA taxes). Over a year, that can add up to thousands in savings.
⏱️ 2. No More Tax on Overtime Pay
Overtime—any hours worked over 40 in a week, is usually taxed just like regular wages. But under the OBBB, your overtime pay is now federal tax-free.
How this helps:
If you're hourly and regularly work overtime, you’ll now keep more of what you earn.
Your overtime rate still applies (usually 1.5x your hourly rate), but you won’t be taxed on the overtime portion for federal income tax.
This is a huge benefit for people in trades, healthcare, logistics, and service jobs.
Example: If your regular wage is $20/hour and you work 10 overtime hours in a week, that’s $300 in overtime pay. Instead of getting taxed on that $300, you’ll now take home more of it—potentially saving hundreds or even thousands each year.
📌 A Quick but Important Caveat
While these provisions are part of the signed bill, guidance on how this will be implemented is still being rolled out through professional tax education and updates from the IRS.
This means:
Details could shift as more guidance becomes available.
Not all systems (like payroll or accounting software) may reflect these changes yet.
You should consult with a tax professional before making any major changes to withholdings or recordkeeping.
We’re staying fully up to date through continuing education and IRS bulletins, and we’ll keep clients informed as everything becomes clearer.
🙋♀️ What You Need to Know
You still file a tax return. The IRS isn’t going anywhere. But now, tips and OT won’t be included in your taxable income for federal purposes.
Employers still report your earnings. You’ll still receive a W-2 showing your wages, tips, and overtime.
Plan your withholdings carefully. If you’re used to getting a tax refund, you might notice a change now that less is being withheld from your paycheck.
State tax laws vary. Some states might not follow the federal rules, so your tips and OT could still be taxed at the state level.
🧾 Bottom Line
This is one of the most worker-friendly changes in years, especially for hourly and service-based workers. Whether you rely on tips or regularly rack up overtime, this law means more take-home pay, fewer surprises at tax time, and a little breathing room in your budget.
Not sure how this affects your paycheck or withholdings? Let’s review your numbers together.
We'll make sure you’re set up to take full advantage of the new tax rules - and navigate any changes as guidance continues to roll out.
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