August 29, 2025
The One Big Beautiful Bill Act (“OBBBA”) was signed into law in July 2025. The OBBBA has several notable consequences for employers and employees alike, including changes to certain federal taxation practices. Among these changes are the much discussed “no tax on tips” and “no tax on overtime.” This article breaks down the most important takeaways from these seismic shifts in tax policy.
No Tax on Tips
The OBBBA provides a new taxpayer deduction, available from 2025 to 2028 (unless renewed for a longer period), that allows employees and self-employed individuals to deduct “qualified tips” received in occupations “that are listed by the IRS as customarily and regularly receiving tips on or before December 31, 2024, and that are reported on a Form W-2, Form 1099, or other specified statement furnished to the individual or reported directly by the individual on Form 4137.”[1] “Qualified tips” are defined as voluntary cash or charged tips received from customers or through tip sharing.[2] The maximum annual deduction is $25,000, and for self-employed individuals, the deduction cannot exceed the individual’s net income from the trade or business in which tips are earned, and phaseouts apply.[3] Notably, mandatory service fees regularly seen in jurisdictions such as Washington, DC are not “qualified tips” and remain subject to tax.
This tax deduction is estimated to benefit approximately four million people in tipped occupations.[4] While the immediate impact is rather small (many impacted taxpayers already pay little to no federal taxes due to their low income brackets), the long-term impact will be determined, in part, by how the job market responds.[5] For example, it is possible that people shift away from non-tipped occupations into tipped ones to obtain the deductions.[6] Also, if tipped occupations become more attractive for jobseekers, employers may consider not raising base wages in favor of promoting tipping.[7] It also remains to be seen whether employers adjust worker pay and benefits or the tip-like fees that some businesses charge to their consumers.[8]
No Tax on Overtime
The OBBBA also provides a new taxpayer deduction, available from 2025 to 2028 (unless renewed for a longer period), that allows individuals who receive qualified overtime compensation to deduct pay that exceeds their regular rate of pay – such as the “‘half’ portion of ‘time-and-a-half’” compensation.[9] “The biggest winners are going to be middle-income workers who work significant overtime and still owe federal income taxes after the standard deduction and other credits.”[10] The maximum deduction is $12,500 individually or $25,000 for joint filers, and phaseouts apply.[11] Notably, taxpayers require a social security number to qualify.[12] This deduction also only covers overtime as contemplated by federal law, and thus, additional compensation earned under more stringent overtime laws, such as those of California, may not qualify for the deduction.
The full effect of this deduction on the labor market and for employers is yet to be realized. One consideration is whether certain employees will now prefer hourly positions over salaried positions to gain the tax benefit. Accordingly, employers should consider whether such hourly positions may become more attractive to the workforce than similarly situated salaries. The deduction may also motivate employees to desire more overtime hours. Employers should be aware of these changes and plan their workplace policies and budgets accordingly.
Dave Dorey of Liff, Walsh & Simmons is the lead of the Labor and Employment Practice at Liff, Walsh & Simmons and has years of experience advising both business entities and individuals on both federal and state labor and employment laws. Dave can help employers assist in developing compliant workplace policies and practices, prepare employers for shifts in labor and employment law, and help employees navigate the constantly shifting landscape of labor and employment law. Jim Crossan leads the Litigation Practice at Liff, Walsh & Simmons. Sean Sapp is an associate of Liff, Walsh & Simmons and a member of the Litigation Practice.
Liff, Walsh and Simmons’ Labor and Employment Group continually tracks labor and employment developments that may impact you or your business. For questions please contact Dave Dorey, partner and head of the Group, Jim Crossan, or Sean Sapp.
This alert provides general information and is not a full analysis of the matters discussed. It may not be relied on as legal advice. Dave Dorey, a Liff, Walsh & Simmons partner licensed to practice law in Maryland, the District of Columbia, Virginia, and California; Jim Crossan, a Liff, Walsh & Simmons partner licensed to practice law in Maryland and the District of Columbia; and Sean Sapp, a Liff, Walsh & Simmons associate licensed to practice law in the District of Columbia contributed to the content of this alert.
[1] IRS, One Big Beautiful Bill Act: Tax Deductions for Working Americans and Seniors (July 14, 2025), https://www.irs.gov/newsroom/one-big-beautiful-bill-act-tax-deductions-for-working-americans-and-seniors (last updated August 25, 2025). A list of such occupations will be produced by October 2, 2025. Self-employed individuals or employees of an employer in a Specified Service Trade or Business are not eligible.
[2] Id.
[3] Id.
[4] Ernie Tedeschi, The “No Tax on Tips Act”: Background on Tipped Workers, The Budget Lab at Yale (June 24, 2024), https://budgetlab.yale.edu/news/240624/no-tax-tips-act-background-tipped-workers.
[5] Id.
[6] Id.
[7] Adamczyk, Alicia, The rules for paying taxes on tips and overtime are changing thanks to Trump’s Big Beautiful Bill. Here’s what to expect, Fortune (July 9, 2025). https://fortune.com/2025/07/09/no-tax-on-tips-overtime-explained-trump-budget/.
[8] Ernie Tedeschi, The “No Tax on Tips Act”: Background on Tipped Workers, The Budget Lab at Yale (June 24, 2024), https://budgetlab.yale.edu/news/240624/no-tax-tips-act-background-tipped-workers.
[9] IRS, One Big Beautiful Bill Act: Tax Deductions for Working Americans and Seniors (July 14, 2025), https://www.irs.gov/newsroom/one-big-beautiful-bill-act-tax-deductions-for-working-americans-and-seniors (last updated August 25, 2025). A list of such occupations will be produced by October 2, 2025. Self-employed individuals or employees of an employer in a Specified Service Trade or Business are not eligible.
[10] Andrew Leahy, No Tax on Overtime Explained, Forbes (July 17, 2025). https://www.forbes.com/sites/andrewleahey/2025/07/17/no-tax-on-overtime-explained.
[11] Id.
[12] Ernie Tedeschi, The “No Tax on Tips Act”: Background on Tipped Workers, The Budget Lab at Yale (June 24, 2024), https://budgetlab.yale.edu/news/240624/no-tax-tips-act-background-tipped-workers.
