Compliance
Understanding the New “Tips & Overtime” Deductions Under the One, Big, Beautiful Bill
IRS guidance brought in new deductions for qualified tips and overtime in 2025-2028—this article breaks down how they work with real examples.
By NomadicTax Research Team • 5-8 min read • December 25, 2025
## What Are the New Deductions?
Under the *One, Big, Beautiful Bill* (signed Public Law 119-21 on July 4, 2025), eligible individuals may claim deductions for **qualified tips** and **qualified overtime** for tax years 2025 through 2028. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-provisions?utm_source=openai))
- **Qualified tips**: Cash or similar payments in occupations that customarily and regularly received tips before December 31, 2024. Reported on W-2, Form 1099, or other statements. Deduction phases out for modified AGI over $150,000 (single); $300,000 (joint). Maximum is **$25,000**. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-provide-guidance-for-individuals-who-received-tips-or-overtime-during-tax-year-2025?utm_source=openai))
- **Qualified overtime**: “Half” portion of time-and-a-half above regular pay for non-exempt workers, per Fair Labor Standards Act, with the same reporting thresholds. Same phase-out limits and maximum of **$12,500** ($25,000 joint filers) for overtime deduction. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-provide-guidance-for-individuals-who-received-tips-or-overtime-during-tax-year-2025?utm_source=openai))
## How to Claim Them (and Examples)
| Step | Action | Example |
|---|---|---|
| 1. Determine eligible income | Look at W-2 box 7 or 1099; include unreported tips where substantiated | **Ann** receives $18,000 in box 7 (reported tips). No need for separate log. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-provide-guidance-for-individuals-who-received-tips-or-overtime-during-tax-year-2025?utm_source=openai))
| 2. Overtime deduction | Use payroll records showing overtime premium; only the excess over regular pay counts | **Bob** has $15,000 total overtime pay; overtime premium (half) is deductible. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-provide-guidance-for-individuals-who-received-tips-or-overtime-during-tax-year-2025?utm_source=openai))
| 3. Self-employed or tips via payment apps | Keep log books; if TPSO shows total payments but not tips, you can report tips you can substantiate | **Doug** tours; got $7,000 tip receipts and logs; even though Form 1099-K shows larger totals, only $7,000 tips deductable. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-provide-guidance-for-individuals-who-received-tips-or-overtime-during-tax-year-2025?utm_source=openai))
## Planning & Compliance Tips
- Save all tip logs, payroll statements, and any form proofs. It's critical for substantiation.
- Ensure SSNs are properly reported if tips are reported by both spouse partners. Does cause joint filing requirement in some cases. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-provisions?utm_source=openai))
- Use the maximum deductions early if possible—they can reduce taxable income significantly, especially for those with high overtime or tips.
- Beware income phase-outs. If you expect income near thresholds, modeling different scenarios helps. A small bump over $150,000 single or $300,000 joint dramatically reduces benefits.
## Impacts & Who Benefits Most
- Service industry workers (servers, bartenders, hairstylists, etc.). Big impact for those whose tips are reported and documented properly.
- Overtime workers in retail, logistics, manufacturing. For those pushing extra hours, even partial amounts can be significant.
- Self-employed individuals who receive tips or customer cash payments. Paired with good recordkeeping, they get similar benefit.
## Sample Case Study
> **Scenario**: Maria is single, made $80,000 in 2025, worked part-time as a hair stylist, received $10,000 in reported tips, $5,000 in unreported tips substantiated via log; worked 500 hours overtime at premium rate of $2,500.
>
> **Qualified tips deduction**: $15,000 tips (sum reported and substantiated) is allowed; since max is $25,000 and her income is below phase-out, full deduction.
> **Qualified overtime deduction**: $2,500 (premium portion) also deducted.
>
> Total deductions reduce her taxable income by $17,500, saving her potentially thousands in taxes depending on her bracket.
## Key Dates & Transition Relief
- Guidance issued in Notice 2025-69 provided clarifications and transition relief for TY 2025. Forms and instructions will be updated. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-provide-guidance-for-individuals-who-received-tips-or-overtime-during-tax-year-2025?utm_source=openai))
- Proposed regulations for detailed definitions and occupation lists are forthcoming. Keep an eye on IRS’s rulemaking and public comment opportunities.
## Final Thoughts
These deductions open new doors for workers who rely on tips or overtime pay—but only if you keep good records, file correctly, and understand phase-outs. When used smartly, they can put real money back in your pocket.