No Tax On Overtime/Tips – The Facts

The budget bill that was passed in July 2025 fulfilled a campaign promise to eliminate taxes on overtime pay and tips.  The law is retroactive to the beginning of 2025 giving those who worked overtime an additional six months of tax-free wages, subject to certain limitations.

No Tax on Overtime

The budget bill that was passed in July 2025 fulfilled a campaign promise to eliminate taxes on overtime pay.  The law is retroactive to the beginning of 2025 giving those who worked overtime an additional six months of tax-free wages.

Note that the tax break only pertains to a portion of overtime pay, or the “half” of “time and a half pay”, required under the federal Fair Labor Standards Act.”

For example, if a worker makes $40 an hour, then their overtime time and a half would amount to $60 an hour.  Of that $60, only $20 (the “half” part of the “time and a half”) remains tax-free.

In addition, “no tax on overtime” is a change only for an employee when they file their Federal tax returns.  State and local income taxes may still apply (unless your state separately conforms).  Federal, Social Security and Medicare taxes are still withheld on all wages including overtime, and all wages, including overtime, must still be reported on form W-2  Employers will be required to file information returns with the IRS showing certain cash tips received and the occupation of the employee receiving those tips.

Importantly, the deduction is limited by a cap on how much overtime pay is deductible:  $12,500 per person annually or $25,000 for people filing together.  There is also a phase-out for the deduction: Earners who make more than $150,000 (or $300,000 for those who are married and filing jointly) will begin to see the deduction reduced at a rate of $100 for every $1000 that the taxpayer’s modified adjusted gross income is above the threshold.  The deduction is completely phased out when income reaches $275,000 for single filers and $550,000 for those who are married and filing jointly.

Another thought is that two people with the same annual pay can end up taxed differently. An hourly worker who logs FLSA overtime can deduct part of that overtime, while a salaried worker putting in the same extra hours gets no break.

Then there are those workers whose overtime pay is dictated by different agreements or laws. Workers who often get overtime pay under union contracts and are exempt from FLSA because they are covered by these contracts generally will not qualify for the deduction.

As of now, the “no tax on overtime pay” law expires in 2028.

No Tax on Tips

Certain workers can now also deduct tips of up to $25,000 from their income on their federal tax returns. Eligible workers are those in occupations that customarily and regularly received tips as of December 31, 2024. The IRS issued proposed rules which would break down those occupations into categories, including food and beverage, personal appearance (hair stylists, manicurists, barbers, etc.), and others.  The tips must be voluntary and in cash or charged; Therefore service charges and other automatic gratuities cannot be deducted.

If the employee is employed by a company or corporation, that employer will keep track of those tips and they will appear on the W2 form at the end of the year.

For those who are self-employed, they must keep all those receipts and calculate how much was received.

This summary is provided for informational purposes only and is not intended to constitute legal advice nor does it create an attorney-client relationship with Rimon, P.C. or its affiliates.

Chris has extensive experience representing both public and private employers. He regularly litigates complex employment matters, including discrimination, restrictive covenant, employee raiding/mobility, and employment-related trade secret matters in state and federal courts across the country. He also represents clients in state and federal wage and hour audits, conducts employment-related due diligence in mergers and acquisitions, assists clients in handling reductions in force, represents management in grievance arbitrations, conducts internal investigations, drafts uniform employment policies for employers on training, leave, and other requirements of multiple states, and drafts physician and executive compensation agreements. Read more here.

Rita DiStefano offers clients her expertise in HR Consulting, including policy development, employee relations, discipline and termination. Rita is a Board member of the HIA-LI and has served as Chair of this organization. She has also served as Chair of the Suffolk Country Workforce Investment Board for the Department of Labor after receiving an appointment for that position from the Suffolk County Executive. Currently Rita is Co-Chair of the LI STEM Hub’s Regional Industry Council for Advanced Manufacturing and a member of the Board of the supply chain organization, ASCM New York-Long Island Forum. Read more here.