H.R. 1 (the Act), formally known as or nicknamed the “One Big Beautiful Bill Act”, was signed into law on July 4, 2025, and addresses the often-mischaracterized classified tax deduction for tips and overtime pay. Tips and overtime pay are not tax-exempt. Instead, the bill allows employees to claim deductions and creates new recordkeeping obligations for employers.
The deduction is available for tax years beginning on or after January 1, 2025, through December 31, 2028.
Employees working in occupations where tipping is customary may qualify, including tips paid in cash, by card, or under a tip-sharing arrangement. To claim the deduction, workers must provide their Social Security number on their tax return. Married workers must file jointly if eligible.
The Treasury Department recently published a preliminary list of occupations that regularly and customarily receive tips, which may be found here. The final list will be included in forthcoming regulations.
Qualifying workers may deduct up to a maximum of $25,000 in tips received from customers. The maximum tip deduction is reduced by $100 for every $1,000 over $150,000 that the employee earns in modified adjusted gross income (or for every $1,000 over $300,000 in income for joint filers).
Qualifying tips are those given voluntarily by the...
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