At a Glance

• H.R. 1 establishes an above-the-line tax deduction for “qualified tips” and “qualified overtime compensation.”
• Both deductions take effect for the 2025 tax year and are set to expire after the 2028 tax year.
• While these provisions may be popular with many employees, the new deductions bring their own set of challenges for employers.

On July 3, 2025, the U.S. House of Representatives narrowly passed H.R.1, the so-called “One Big Beautiful Bill Act,” ending a dramatic journey through Congress that dominated headlines in recent weeks. President Donald J. Trump is expected to sign the bill into law on July 4. The Act is intended to be the Trump administration’s marquee legislation leading up to the 2026 midterm elections. It includes several provisions related to campaign promises made by then-candidate Trump. This ASAP explains two of the campaign’s more populist campaign promises that were incorporated into the final legislation: “no tax on tips” and “no tax on overtime.”

No Tax on Tips

Section 70201 of the Act establishes a new above-the-line tax deduction for “qualified tips.”¹ The following conditions apply:

1. The deduction is capped at $25,000 per year. This amount is reduced by $100 for each $1,000 by which the taxpayer’s modified adjusted gross income exceeds $150,000 ($300,000 in the case of a joint return).
2. To be considered a “qualified tip,” the amount must: (a) be paid voluntarily without any consequence in the event of nonpayment; (b) not be the...

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