Tax Planning
Maximizing Deductions Under the "No Tax on Tips" and Overtime Provisions of OBBB
New laws under the One, Big, Beautiful Bill (OBBB) let certain workers deduct qualified tips and overtime — here’s how to qualify and what to watch out for.
By NomadicTax Research Team • 5-8 min read • November 14, 2025
## What Are the New Deductions for Tips and Overtime?
The One, Big, Beautiful Bill (Public Law 119-21) introduces two key deductions starting for **tax year 2025**:
- **Qualified Tips Deduction** under IRC §224, allowing workers in certain occupations to deduct 'qualified tips'. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-guidance-listing-occupations-where-workers-customarily-and-regularly-receive-tips-under-the-one-big-beautiful-bill?utm_source=openai))
- **Qualified Overtime Deduction**, enabling deduction for overtime compensation meeting defined criteria. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-provide-penalty-relief-for-tax-year-2025-for-information-reporting-on-tips-and-overtime-under-the-one-big-beautiful-bill?utm_source=openai))
There are also **new reporting requirements** for employers and payors to provide detailed statements, including occupation codes and separate disclosure of tips or overtime. But relief is in place for failing to meet those in 2025. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-provide-penalty-relief-for-tax-year-2025-for-information-reporting-on-tips-and-overtime-under-the-one-big-beautiful-bill?utm_source=openai))
## Who Qualifies?
To claim these deductions, taxpayers must satisfy several conditions:
- **Occupation**: Must be in a job that customarily and regularly received tips (based on a list of nearly 70 occupations, including bartenders, servers, chauffeurs, etc.). ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-guidance-listing-occupations-where-workers-customarily-and-regularly-receive-tips-under-the-one-big-beautiful-bill?utm_source=openai))
- **Income Level Limits**: The deduction — for tips — is capped at **$25,000**; there’s a phase-out starting at **$150,000 (single)** / **$300,000 (married filing jointly)** of Modified Adjusted Gross Income (MAGI). ([irs.gov](https://www.irs.gov/irb/2025-42_IRB?utm_source=openai))
- **Filing Status**: Married taxpayers generally must file **jointly** to claim either deduction. ([irs.gov](https://www.irs.gov/irb/2025-42_IRB?utm_source=openai))
- **Other Requirements**: Tips must be reported on W-2, 1099, or directly via Form 4137; qualified overtime must be reported too. Employers must issue statements. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-provide-penalty-relief-for-tax-year-2025-for-information-reporting-on-tips-and-overtime-under-the-one-big-beautiful-bill?utm_source=openai))
## Transition Relief and Penalties for 2025
Employers/payors are in a transition period for **tax year 2025**: relief from penalties for not yet fully complying with new reporting requirements, such as electronical reporting of tips or overtime and separate statements. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-provide-penalty-relief-for-tax-year-2025-for-information-reporting-on-tips-and-overtime-under-the-one-big-beautiful-bill?utm_source=openai)) In particular, employers won’t be penalized for omitting the occupation of tipped workers or failing to provide separate tip/OT income detail for that year. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-provide-penalty-relief-for-tax-year-2025-for-information-reporting-on-tips-and-overtime-under-the-one-big-beautiful-bill?utm_source=openai))
## Practical Examples
- **Example 1**: A server in a restaurant earns $15,000 in qualified tips in 2025. Because server is on the OBBB occupation list, they may deduct the full $15,000 (assuming MAGI is under threshold). If MAGI is $160,000 as single filer, part of the deduction is phased out.
- **Example 2**: A married couple files jointly, with one spouse working as a rideshare driver who receives $20,000 in tips. Rideshare drivers are included on the occupation list. They can deduct up to $25,000 subject to MAGI phase-out. If MAGI is under $300,000, full deduction applies.
- **Example 3**: An employer in 2025 has not yet tracked employees’ occupations by code or separately reported tip/overtime compensation. Under Notice 2025-62, they are given penalty relief for that year, but should prepare systems for 2026 compliance. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-provide-penalty-relief-for-tax-year-2025-for-information-reporting-on-tips-and-overtime-under-the-one-big-beautiful-bill?utm_source=openai))
## Actionable Tax Planning Tips
- **Confirm your occupation** matches one on the IRS/ Treasury’s proposed list. If not, revise your Form 1040 occupation entry (honestly) to reflect qualified work.
- **Keep excellent records** of tips, tip pooling, share tips, and overtime hours. Document everything; ask employers/payors for statements.
- **Estimate MAGI early** to see if phase-outs will reduce deductions. Plan timing of income or deductions.
- **For employers/payors**: Start collecting required data (occupation codes, tip breakouts, overtime amounts) even before IRS forms updated. Use bonus statements or payroll records.
## Why It Matters
These changes represent a rare opportunity:
- Increase in **after-tax income** for tipped workers and those earning overtime—qualified tips deduction could mean a couple thousand dollars in extra take-home pay.
- Offers **clarity and fairness**, especially for those in occupations long receiving tips but marginalized in reporting frameworks.
- Announces shift toward **stronger compliance and clearer guidance**, which reduces improper denials or misclassifications.
**Bottom line**: If you're in a tipped or overtime job, or employ those who are, these deductions under OBBB can mean meaningful savings. But 2025 is transitional—get ready now for full compliance in 2026.