Compliance
Understanding the “No Tax on Tips” & Overtime Reporting Rules Under OBBB: What Employers and Workers Need to Know
New deductions under the One, Big, Beautiful Bill create reporting obligations and temporary relief, reshaping how tipped and overtime earnings are taxed in 2025-2028.
By NomadicTax Research Team • 5-8 min read • November 21, 2025
## What Did the One, Big, Beautiful Bill (OBBB) Change?
Under the OBBB, effective for **tax years 2025 through 2028**, new deductions are available for certain cash tips and qualified overtime. These are backed by specific reporting obligations for employers and other payors. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-act-of-2025-provisions?utm_source=openai))
### Key Provisions
- **Cash Tips Deduction**: Workers in nearly 70 occupations (from bartenders to valet attendants) may deduct up to **$25,000** in cash tip income, if their income is below $150,000 (single) or $300,000 (joint). ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-act-of-2025-provisions?utm_source=openai))
- **Qualified Overtime Deduction**: Workers can deduct the portion of overtime pay that exceeds their regular rate (e.g., “half-time” pay) up to **$12,500** ($25,000 joint filers). Same income caps apply. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-act-of-2025-provisions?utm_source=openai))
### Reporting Requirements & Relief
- Employers and payors **must issue information returns** showing total qualified tips and overtime compensation. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-act-of-2025-provisions?utm_source=openai))
- For **tax year 2025**, the IRS and Treasury are providing **penalty relief** for failures to comply with these new reporting rules. ([eitc.irs.gov](https://www.eitc.irs.gov/newsroom/topics-in-the-news?utm_source=openai))
## Practical Impacts & Examples
| Worker Type | Before OBBB | Under OBBB |
|-------------|---------------|------------------|
| Restaurant Server | All tip income taxed fully; no specific deduction for cash tips | Can deduct cash tips (subject to definition of occupations) reducing taxable income significantly |
| Warehouse Worker with OT | Overtime taxed fully without special deduction | OT “half‐time” portion may be deducted (e.g., if base pay is $20/hr, OT pay of $30/hr, the extra $10/hr for OT hours could be partially deductible) |
### Example Calculation
Maria works as a waiter and earns $40,000, including $6,000 in cash tips. Under OBBB, Maria could deduct, say, $6,000 in cash tips (if occupation qualifies), reducing her taxable income. If she also worked overtime and earned $5,000 extra—of which $2,500 represents the overtime half-rate—that $2,500 could also be deductible (up to the limit). All must be reported properly.
## To-Do List for Employers & Workers
- Determine if your occupation qualifies under the “customarily and regularly receive tips” list in the proposed regulations. ([irs.gov](https://www.irs.gov/irb/2025-42_IRB?utm_source=openai))
- **Track qualified overtime separately** and ensure payroll systems can report the required info. |
- Educate staff (paypersons, HR) on how to record cash tips vs. credit card tips—only cash tips are eligible. |
- Review income thresholds (MAGI) to confirm eligibility. |
- Take advantage of the 2025 penalty relief, but prepare systems now for full compliance by 2026. |
## What Employees Should Ask Employers
- “Can you provide my total cash tips and qualified overtime in writing (via W-2 or statement)?”
- “Will my role be recognized as one of the qualifying occupations?”
- “What happens if I exceed the deduction thresholds or income caps?”
By grasping the changes under OBBB and preparing in advance, employers and employees can make full use of the benefits and avoid penalties as the new reporting requirements roll into full effect.