Tips and Overtime Under The One Big Beautiful Bill

On July 4, 2025, President Trump signed the One Big Beautiful Bill into law. The legislation makes far-reaching changes to the federal tax code and other parts of the government. The bill cuts certain taxes, changes funding for a number of federal programs, raises the debt ceiling by $5 trillion, and extends many of the provisions originally introduced in the 2017 Tax Cuts and Jobs Act (TCJA).

Deduction of Tip Income

Individuals can deduct up to $25,000 of tip income to arrive at taxable income beginning in 2025. The deduction phases out beginning at $150,000 ($300,000 for individuals filing married joint returns) of modified adjusted gross income. There are several restrictions on the deduction. First, the tips must be received by the individual in an occupation which customarily and regularly received tips on or before December 31, 2024. The Treasury is supposed to produce a list of those industries. Second, the tips must be paid voluntarily without consequence for nonpayment. Finally, the tips cannot be from an activity that is a specified service trade or business.

The restrictions will lead to some record keeping challenges. For example, some restaurants make tips mandatory for parties of a certain size. To the extent that a restaurant employee receives the mandatory portion of these tips, the tips are not eligible for the deduction. For example, assume that Mama’s is a restaurant that requires a 15% tip for parties of six or more individuals. Ann is a server for the restaurant and receives a 20% tip from a party of six patrons on a $1,000 bill. Of the $200 tip, $50 is eligible for the deduction.

The IRS will need to publish reporting rules for reporting the tips on employee W-2s. If you are in an industry where tips are traditional, you will need to work with your payroll provider to make sure you properly track eligible tips in their system.

Extension of Tip Credit to Beauty Businesses

Restaurants and bars have traditionally received an income tax credit for the employer social security taxes paid on reported tips. The One Big Beautiful Bill extended this tax credit to beauty service businesses. Hair solons, nail salons, barbers and similar businesses now qualify for the credit beginning in 2025.

Deduction of Overtime Income

Individuals are now eligible for a deduction for overtime pay for 2025 through 2028. The maximum deduction is $12,500 and phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for taxpayers filing married joint returns). The overtime eligible for the deduction is only the portion of the pay that is in excess of the employee’s normal rate of pay. For example, if an employee earns $30 per hour for eligible overtime work and $20 for normal pay, only the $10 difference is eligible for the deduction. Also, the overtime pay must be required under section 7 of the Fair Labor Standards Act of 1938 to be eligible. This means that exempt employees will not be eligible for the deduction.

The IRS will need to publish rules for reporting the eligible overtime pay on employee W-2s. If your business pays eligible overtime wages, you will need to work with your payroll provider to make sure you are tracking the eligible wages.

Contact Us 

With major changes to tax rules, both individuals and business owners are encouraged to revisit tax strategies. A proactive approach will be essential to capture benefits, manage risk, and stay compliant as the new provisions take effect. If you have questions about the information outlined above, or need assistance with another tax issue, WhippleWood CPAs can help. For additional information call 303-989-7600 or click here to contact us. We look forward to speaking with you soon.