IRS releases new guidance for ‘no tax on tips’ and overtime deductions

the IRS It issued its guidance on the “no tip tax” and “no overtime tax” provisions of the One Big Beautiful Bill Act (OBBBA), for workers who can claim deductions for the 2025 tax year.

president Donald Trump OBBBA was signed into law in July after the Republican majority in congress passed the tax and spending reform bill on a party-line vote this summer.

The law includes “no tax on tips” and “no tax on overtime,” and the Treasury Department and the IRS are now providing guidance as the law is intended to help workers determine their deductions.

Taxpayers eligible to claim overtime income deductions may have to determine those amounts separately this year since Form W-2 and Form 1099 will not be updated to include income from tips and overtime for the 2025 tax year, the IRS notice said.

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Taxpayers can review examples at IRS guidance Explains how tipped income and overtime deductions work based on the reported or unreported income they received.

Under OBBBA, workers who receive Qualified tips Up to an annual maximum of $25,000 can be deducted and the deduction phases out for taxpayers with modified adjusted gross income of more than $150,000 (or $300,000 for joint filers).

IRS estimates there are approx 6 million workers report inverted wagesThe inverse income deduction applies to the tax years from 2025 to 2028.

Eligible workers can deduct up to $25,000 in tips. (Lindsay Nicholson/UCG/Universal Image Group via Getty Images) / Getty Images)

The “no overtime tax” provision allows individuals who receive qualified overtime compensation to deduct pay in excess of their regular pay — which is usually the “one-half” portion of “time and a half” overtime pay — that is reported on a Form W-2, Form 1099 or other specific statement provided.

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The maximum annual deduction is $12,500 (or $25,000 for joint filers) and the deduction phases out for taxpayers with adjusted gross income of more than $150,000 (or $300,000 for joint filers). It is worth noting that the deduction is available to itemized and non-itemized taxpayers.

the Fair Labor Standards Act Requires that most employees receive at least the federal minimum wage for all hours worked and overtime pay of at least half their regular rate of pay for working more than 40 hours per week.

President Donald Trump has made “no tax on tips and overtime” a major part of his economic agenda that is included in the OBBBA. (Wayne McNamee/Getty Images)

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However, some employees are exempt from the overtime rules, such as those who earn a minimum salary of $1,128 per week or $58,656 per year, or those working in certain professional roles.

Additionally, the IRS said it is updating income tax forms and instructions for taxpayers to use this filing season that will help them claim these deductions.

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The start date for the 2025 tax year filing season has not yet been announced, although it has been late January in recent years.