Starting in 2025, you may be able to deduct up to $25,000 in tips and up to $12,500 ($25,000 for joint filers) in overtime pay from your taxable income. Thanks to the One Big Beautiful Bill Act (OBBBA), these new deductions could mean more money in your pocket—especially if you work in service, hourly, or gig-based roles.
The One Big Beautiful Bill Act (OBBBA) introduces two groundbreaking tax deductions designed to support workers who rely on tips and overtime pay—groups often overlooked in traditional tax relief efforts. These provisions, available from 2025 through 2028, aim to reduce taxable income for individuals in occupations where extra earnings are common but often taxed heavily.
For many workers, tips and overtime represent a vital part of their income. Yet until now, these earnings were fully taxable, often pushing individuals into higher tax brackets or triggering unexpected liabilities. OBBBA changes that by allowing up to $25,000 in qualified tips and $12,500 in qualified overtime pay to be deducted annually, with higher limits for joint filers.
These deductions are especially impactful for:
• Service industry professionals
• Hourly wage earners
• Gig economy participants
• Small business contractors
By lowering taxable income, OBBBA helps workers keep more of what they earn—without needing to restructure their employment or income sources. The deductions also come with clear reporting requirements and income thresholds, making it easier for taxpayers to plan ahead and file accurately.
Workers can claim an income tax deduction for qualified tips received in tax years 2025 through 2028.
• A qualified tip is any cash tip received in an occupation that customarily and regularly received tips on or before December 31, 2024.
• Deduction is limited to $25,000 per tax year.
• Phaseout begins at:
• $150,000 MAGI for single filers
• $300,000 MAGI for joint filers
• For nonemployee individuals, tips are deductible only if gross receipts exceed allocable deductions.
• On Form 4137 by the employee (if the employer did not report them)
• For nonemployees, tips must be reported by the service recipient on Form 1099-NEC or Form 1099-K
• The taxpayer’s Social Security Number must appear on the return
• Married taxpayers must file jointly to claim the deduction
Workers earning overtime under the Fair Labor Standards Act (FLSA) can deduct up to $12,500 per year, or $25,000 for joint filers.
• Applies to overtime pay that exceeds the regular rate under FLSA
• Same phaseout thresholds as the tip deduction: $150,000 for single filers / $300,000 for joint filers
• Overtime must be reported on:
• Form W-2 (employees)
• Form 1099-NEC (nonemployees)
• SSN must be included on the return
These deductions can significantly reduce taxable income for:
• Hourly workers earning overtime
• Gig workers and independent contractors reporting income via 1099 forms
At AllTax Accounting, we help workers and small business owners navigate new tax rules with confidence. Whether you're reporting tips, calculating overtime, or managing 1099 income, our team is here to guide you every step of the way.