New Tip and Overtime Deduction Provisions Under H.R.1

HR1 introduces two below-the-line tax deductions for qualified tips and for qualified overtime compensation. 

While the new law does not eliminate payroll taxes on this income, there are income tax deductions available to taxpayers below certain income limitations.

The new Act allows taxpayers to deduct up to $25,000 in qualified tips and $12,500 in qualified overtime on their personal tax return.  These deductions will be effective for tax years 2025 through 2028.

These deductions are available to both itemizing and non-itemizing taxpayers. However, they begin to phase out at an adjusted gross income (AGI) of $150,000 for single filers and $300,000 for joint filers.

Qualified Tips

Qualified tips must be earned from occupations that customarily and regularly receive tips and must be reported on a Form W-2, 1099, or 4137.

Qualified tips are voluntary cash or charged tips received from customers or through tip sharing.  The maximum deduction is $25,000, but for self-employed individuals, the deduction cannot exceed the net income from the business.  Additionally, if the self-employed business is a specified service trade or business (SSTB) defined by Code Section 199A, then no deduction will be allowed.  Employees of an SSTB are also not eligible for the deduction.

Qualified Overtime

Qualified overtime is the excess wage paid above an employee’s normal rate. The maximum deduction is $12,500 for non-joint taxpayers or $25,000 for joint taxpayers.

Reporting

Employers and other payors will be required to provide the qualified tip and overtime information to both the IRS and taxpayers.  For the tip deduction reporting, employers must also furnish the occupation.

The IRS is currently working on transition guidance for tax year 2025 to support compliance with these new requirements.

Employers, particularly those in tip- and overtime-intensive industries (e.g., hospitality, food service), should take proactive steps to prepare:

• Coordinate with payroll providers to ensure accurate reporting of qualified tips and overtime.
• Begin internal tracking of these items as soon as possible to support year-end reporting and tax documentation.
• Communicate these changes clearly to employees so they can monitor their paystubs and understand any relevant tax implications.

For assistance with compliance and implementation, employers are advised to consult their payroll service providers and tax professionals.  Please do not hesitate to contact us if you have any questions.