The Big Beautiful Bill: No Tax on Overtime and Tips Brings Big Savings
On July 4, 2025, the United States saw one of the most talked-about tax reforms in years: the signing of the One Big Beautiful Bill Act, better known as the Big Beautiful Bill. This legislation was celebrated as a major victory for working Americans, fulfilling promises made during President Trump’s campaign.
Among its many provisions, two stand out as life-changing for millions of workers: No Tax on Overtime and No Tax on Tips. Both measures are designed to give people who put in extra effort more financial breathing room. Whether you are a server relying on tips, a healthcare worker clocking long hours, or a delivery driver hustling to make ends meet, these provisions could put thousands of extra dollars in your pocket over the next few years.
This article explains in detail how the Big Beautiful Bill affects overtime pay and tip income, who qualifies, and what both employees and employers need to know.
The Big Beautiful Bill and Its Focus on Workers
The Big Beautiful Bill was designed to target tax relief where it matters most: working-class Americans. Instead of broad corporate tax cuts, the law’s biggest highlights focus on hourly and tipped employees who often carry the weight of the service economy.
As explained in CNBC’s coverage, the No Tax on Overtime and No Tax on Tips provisions are temporary, lasting from 2025 through 2028, but could save employees thousands of dollars during this window.
No Tax on Overtime: A Closer Look
What It Does for Workers
The law allows workers to deduct up to $12,500 of overtime pay from their federal taxable income each year. For married couples filing jointly, this doubles to $25,000.
According to the IRS newsroom, the purpose is to encourage hard work without punishing employees through higher taxes.
Who Qualifies for the Deduction
The benefit only applies to overtime required by the Fair Labor Standards Act (FLSA). Specifically:
Overtime worked beyond 40 hours per week.
The “extra half” earned in a time-and-a-half pay structure.
It does not apply to overtime negotiated under special union rules or extra hours granted by certain state laws.
Income Limits
Not everyone will qualify. The benefit begins to phase out for:
Individuals earning more than $150,000 annually.
Married couples earning more than $300,000 annually.
This ensures the deduction is primarily targeted at middle- and lower-income workers.
How It Works in Practice
One of the biggest advantages is that this is an above-the-line deduction. In plain terms, this means:
You do not need to itemize deductions.
Even if you claim the standard deduction, you still benefit.
Limitations on the Deduction
The exemption only applies to federal income tax.
You still pay Social Security and Medicare taxes on your overtime wages.
State and local income taxes may still apply, depending on your location (source).
No Tax on Tips: A Game-Changer for Service Workers
What It Does for Workers
The second major provision allows tipped employees to deduct up to $25,000 in tip income from their federal taxable income. For servers, bartenders, delivery drivers, and hospitality staff, this is one of the most significant tax breaks ever offered.
As reported by the Senate Finance Committee, this is intended to provide fairness for workers in industries where tipping is customary and often essential for survival.
Who Qualifies for the Deduction
Not every type of tip counts. The rules clarify that:
Only voluntary tips qualify, such as money left directly by customers.
Mandatory service charges automatically added to a bill are not included.
The Treasury Secretary has the final say on which job categories are eligible.
As with overtime pay, the deduction phases out for higher earners making above $150,000 (single) or $300,000 (joint).
Reporting Requirements for Tips
In order to take advantage of this deduction:
Tips must be reported on your W-2.
You cannot claim unreported cash tips as part of the deduction.
What It Does Not Cover
Federal income tax is reduced, but you still owe Social Security and Medicare taxes on tip income.
State and local income taxes still apply unless local laws change (source).
How Workers Benefit
Imagine you are a bartender earning $20,000 in tips in a year. Under the Big Beautiful Bill, you can deduct that full amount from your taxable income, which may lower your federal tax bill by thousands of dollars.
Or consider a nurse working extra shifts who earns $10,000 in overtime. Thanks to the deduction, that money will not increase taxable income at the federal level, keeping more earnings in their pocket.
As explained in Bankrate’s analysis, these changes are designed to ensure that workers are not punished for working hard or depending on customer generosity.
What Employers Need to Know
Employers also play a role in making these provisions successful. Key requirements include:
Beginning in 2025, payroll systems must separately report overtime and tip income on employee tax forms.
Some businesses may need to upgrade software or adjust HR systems to handle the new categories. For you, our client, NO upgrade is required. We got you.
Employees will not see savings in each paycheck. Instead, the benefit appears when they file their annual tax returns (source).
- MOST IMPORTANTLY: No real action is required of you. You just need to make sure that when you pay your employees, OT is separated from regular pay, and that tips are reported as a stand-alone earning. Don’t mix them with other earnings.
This means clear communication with employees is essential, so they understand that their paychecks will look the same during the year, but their tax refunds may be larger.
Key Takeaways
The No Tax on Overtime provision allows up to $12,500 in overtime deductions for individuals, or $25,000 for joint filers.
The No Tax on Tips provision allows up to $25,000 in tip deductions.
Both apply from 2025 to 2028, unless extended by Congress.
These deductions only apply to federal income taxes, not payroll, Social Security, or Medicare taxes.
The deductions phase out at higher income levels.
Employers must update reporting practices to comply with new requirements.
Conclusion
The Big Beautiful Bill represents a major shift in how America treats workers’ extra income. By introducing No Tax on Overtime and No Tax on Tips, the government has given millions of people the chance to keep more of what they earn.
For employees, this means more financial relief. For employers, it means adapting payroll processes to ensure compliance with the law. That is where Accupay Systems can help. With our advanced HR and payroll software, we make sure businesses stay ahead of tax law changes while providing employees with accurate, transparent reporting.
The bottom line: with the Big Beautiful Bill, workers keep more of their income, and with Accupay Systems, businesses keep payroll simple, compliant, and stress-free.