Tax Planning

Navigating the New Overtime & Tips Deductions Under the One, Big, Beautiful Bill

The One, Big, Beautiful Bill (OBBB) introduces new deductions for qualified overtime and tips – but employers and employees must follow precise rules to claim them successfully.

By NomadicTax Research Team • 5-8 min read • November 22, 2025

## Overview of the New Deductions The OBBB (Public Law 119-21, enacted July 4, 2025) establishes **two new tax deductions** for individual taxpayers beginning in tax year 2025: - **Qualified tips**: Employees or self-employed individuals in occupations that “customarily and regularly” receive tips (on or before December 31, 2024) may deduct up to **$25,000** of qualified tips. However, this phases out for modified adjusted gross income (MAGI) over **$150,000** (single) or **$300,000** (married filing jointly). ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-act-tax-deductions-for-working-americans-and-seniors?utm_source=openai)) - **Qualified overtime compensation**: The portion of overtime pay (e.g. the "half" portion of time-and-a-half pay required by the Fair Labor Standards Act) may be deducted up to **$12,500** individually ($25,000 joint filers), again with phase-out at the same MAGI thresholds. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-act-tax-deductions-for-working-americans-and-seniors?utm_source=openai)) ## Employer and Payor Obligations + Transition Relief Employers, payors, and lenders have new reporting obligations: - They must file information returns and provide payee statements that show **separate accounting** of cash tips and the employee’s occupation; similarly for qualified overtime pay. Forms W-2 or 1099 may suffice if modified. ([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)) - The IRS has provided **penalty relief** for tax year 2025: employers or payors won’t face penalties for failing to provide separate accounting of cash tips or overtime, or including occupation codes, **if a correct and complete return or statement is filed otherwise**. ([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)) - The Forms W-2, existing Forms 1099, and payroll return forms will remain unchanged for tax year 2025. This simplifies compliance until new forms are released for 2026. ([irs.gov](https://www.irs.gov/newsroom/irs-announces-no-changes-to-individual-information-returns-or-withholding-tables-for-2025-under-the-one-big-beautiful-bill-act?utm_source=openai)) ## Practical Examples - **Single employee named Sara**, MAGI $160,000, works serving tables, earned $30,000 in qualified tips. Sara can claim up to $25,000, then phase out: over $150,000 by $10,000 ⇒ reduce her deduction by $1,000, yielding a qualified tips deduction of **$24,000**. Sara must include her SSN, file jointly if married, claim via return. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-act-tax-deductions-for-working-americans-and-seniors?utm_source=openai)) - **Couple filing jointly**, MAGI $200,000, one spouse works overtime—qualifying overtime pay $20,000. They can deduct up to $25,000, but since their MAGI is over $150,000, phase-out applies: over by $50,000 ⇒ reduce the allowed deduction by $5,000, leaving **$20,000** deduction. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-act-tax-deductions-for-working-americans-and-seniors?utm_source=openai)) ## Key Takeaways for Employers & Individuals - Employers/payors should begin collecting occupation information and separate accounting of tips and overtime **even during 2025**, though no penalties will apply during transition period for misreporting on those new items. ([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)) - Individuals claiming the deductions must ensure they have accurate statements from employers/payors. If not yet available, keeping records or asking employer to use online portal/statements will help. ([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)) - For withholding: employees may need to use the **deductions worksheet on the 2025 Form W-4** rather than rely on the current Tax Withholding Estimator (which doesn’t yet include tips/overtime/certain deductions). ([irs.gov](https://www.irs.gov/forms-pubs/how-to-update-withholding-to-account-for-tax-law-changes-for-2025?utm_source=openai)) ## Action Plan Checklist - Identify whether your occupation is on the list of “customarily and regularly” tipped occupations (IRS will publish this; some guidance already available) ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-act-tax-deductions-for-working-americans-and-seniors?utm_source=openai)) - If you earn overtime/qualified tips and wish to claim the deduction, begin collecting required statements and ensure employer/payor cooperation for reporting. - Employers to evaluate internal payroll systems and prepare to separate tip/overtime info correctly; consider Box 14 of W-2 or separate statements. - Reassess withholding: update W-4 with deductions worksheet if applicable. Monitor IRS updates to withholding estimator for 2026. ## Why It Matters These changes provide **more take-home pay** potential, especially for service workers and those working significant overtime. They also introduce **complexity & compliance risk**, especially for businesses handling payroll, streamlining records, and for taxpayers to claim deductions effectively. Being proactive in 2025 will smooth transition into full enforcement in 2026.