On the campaign trail, President Donald Trump promised to eliminate taxes on tips and overtime. A version of that promise made it into the “big beautiful” tax-and-spending package he signed into law on Friday, but it comes with some strings attached.
The bill includes two provisions that create above-the-line deductions for both tips earned in traditionally tipped occupations and for overtime pay. This means workers can subtract earnings from tips and overtime from their taxable income, effectively exempting those amounts from federal income tax.
However, not all workers will be eligible for the deduction, and there are some caveats for how much you can deduct and which taxes are eliminated.
Here is a breakdown of what the bill says.
The amount workers earn from tips and working overtime won’t be completely tax free. The exemption only applies toward federal income tax. Federal payroll tax — a flat tax split between employers and employees to fund Social Security and Medicare — will still apply to any earnings.
Additionally, workers will still be subject to state and local income and payroll taxes.
In both cases, eligibility starts to phase out for individuals making more than $150,000 a year, or $300,000 a year for joint filers. The deduction is reduced by $100 for every $1,000 you earn above that limit.
Those who make less than the standard deduction — $15,000 in 2025 for single filers and $30,000 for joint filers — already owe no federal income tax.
There is also a cap on the maximum amount you can deduct each year and limits on which types of workers are eligible for each deduction.
On tipsDeduction limit: $25,000 per yearWhat can be deducted: Tips received in cash, paid by card, as well as tips received through tip-sharing arrangements.Who can claim the deduction: Workers in occupations that traditionally receive tips, including those in the food service and beauty industries. The full list of eligible jobs will be specified by the U.S. Treasury Department and Internal Revenue Service at a later date.On overtimeDeduction limit: $12,500 per year ($25,000 for joint filers)What can be deducted: The money a worker receives when working overtime that’s beyond their standard hourly wage. If your overtime rate is 1.5 times the regular rate, that means only the extra 50% can be deducted.Who can claim the deduction: Workers eligible for overtime compensation under the Fair Labor Standards Act. Generally, this means employees who are paid time-and-a-half for working over 40 hours a week, but there are exceptions.
Changes are temporaryWho the policy affects
In 2023, about 97.7 million workers were eligible for overtime protections under the FLSA, according to the latest data analyzed by the Yale Budget Lab. However, only around 8% of hourly and 4% of salaried workers regularly worked overtime.
As for tipped workers, only 4 million workers, or 2.5% of the U.S. workforce, held jobs where tips are common in 2023, according to an analysis by the Yale Budget Lab. Of those, about 60% of households with tipped workers would receive a cut, according to the Tax Policy Center, amounting to about $1,800 per household per year.
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