The Internal Revenue Service (IRS) released some very interesting information: In the next few yeas, many people in the United States working on tips and overtime, will be seeing some changes in the way they their revenue is taxed: eligible workers to deduct specific amounts linked to their tips or extra hours payments. At the same time, the IRS is also warning that any mistake or incorrect information about how much they make, could end up on more debt or even penalizations.
This new norm comes form the “One Big Beautiful Bill” (OBBB) legislations, and will be applicable to the 2025 to 2028 fiscal years. What the goal? They claim this would be a relief for people working long shifts, irregular timetables, and depending on tips.
However, the rules are very strict, that’s why understanding the basic of these changes is vital to avoid any surprises later.
How the new tip deductions regulation work
Certain employees who receive tips may be eligible for a special deduction on their tax return for 2025 and the next three years under the new regulations. Around six million workers, including bartenders, restaurant servers, and certain independent contractors, report receiving tips, according to the IRS.
The idea is that qualifying tips can be deducted up to a maximum amount each year. For tipped workers, tips can be deducted up to $25,000 per year.
- This applies to single filers with a modified adjusted gross income (AGI) is over $150,000.
- The income cap is $300,000 for joint filers.
The IRS gives a simple example: if a server has $18,000 in reported tips on their W-2 for the year, that full amount can be used for the deduction (because it is under the $25,000 cap). If a worker had more than $25,000 in tips, they could only deduct up to the $25,000 maximum.
Only reported tips are eligible for this deduction. If someone does not report all the tips they actually receive, standard tax rules still apply; meaning additional taxes later, plus fines.
In addition, the IRS specifies that employers will not be penalized for not providing separate reporting about overtime or gratuities, as long as they fulfill their ordinary reporting obligations for the 2025 tax year.
What changes for overtime pay
Additionally, from 2025 to 2028, the same law establishes a new deduction for overtime compensation. This component of the rule focuses on the extra pay workers receive for hours worked outside their regular timetable:
- Workers who earn “qualified overtime compensation” can deduct the part of their earnings that is beyond their regular rate.
- For single filers with AGI over $150,000, the maximum annual deduction for overtime is $12,500.
- For joint filers with AGI $300,000, the maximum deduction is $25,000.
What workers should keep in mind
For anyone who depends on tips or overtime, there are a few important things to know as the 2025 tax year approaches:
- Report everything honestly: The IRS makes it clear that those who underreport or fail to report their wages can wind up owing additional taxes and incurring fines. The new deductions benefit only if your information is correct.
- Know the limits. The tip deduction is restricted at $25,000 for individuals above the income level. The overtime deduction is capped at $12,500 for qualifying single filers and $25,000 for qualifying joint filers. Anything exceeding those amounts does not count for the deductible.
- Understand your filing status and AGI. Whether you file as single or jointly, and how high your adjusted gross income is, will influence if you qualify for these deductions at all.
- Expect more personal responsibility. Because employers would not be punished for not disclosing special overtime or tip breakdowns, workers need to pay more attention to their own records and pay stubs.