Are There Really no Taxes on Tips and Overtime?

Here’s the reality, stripped of hype and slogans: there is not a law that completely erases all taxes on tips or overtime. What actually passed under the One Big Beautiful Bill in 2025 is a limited deduction for certain tip income and certain overtime pay. It’s less of a tax holiday and more of a discount—you get to subtract some of it before your taxable income is calculated.

The key point is the difference between an exemption and a deduction. An exemption would mean you never count the income in the first place. A deduction means you count it, then subtract part of it before taxes are figured. The new rules create deductions for “qualified tips” and “qualified overtime compensation” for tax years 2025 through 2028.

For tips, the deduction applies if your job is one that customarily and regularly receives tips, such as servers, bartenders, or others defined by IRS guidance. You can deduct up to $25,000 of those tips from your federal taxable income. But you still must report all tip income, and the deduction phases out once your income goes past certain thresholds.

For overtime, the deduction applies only to the premium portion of overtime pay—that extra half-time added to your base rate under labor law. You can deduct up to $12,500 if filing single or $25,000 if filing jointly. Again, that reduces your taxable income but doesn’t erase taxes entirely.

There are important catches. You will still owe Social Security and Medicare taxes on all tips and overtime. Employers will still withhold federal income tax when wages are paid, because the deduction is something you claim later on your tax return. The provision is temporary, only running through 2028 unless extended. High-income earners may see the deduction reduced or eliminated. Some types of payments, like automatic service charges or non-qualified tips, won’t count. And state tax laws may not match the federal rule, which means you could still owe state tax on the full amount.

The takeaway is that the new law gives partial relief, not a total exemption. It reduces taxable income for many workers who earn tips or overtime, but it does not mean there is truly “no tax” on that money.