Among the cacophony of campaign promises floated by then-candidate Trump prior to the 2024 presidential election, one drum beat steadily: A vow to implement a no-tax-on-tips and no-tax-on-overtime law.
Martin C. Kuhn, Marquette 2004, Marquette 2004, is the founder of
Kuhn Law, in Milwaukee, where he has focused on labor and employment for 19 years.
On July 4, 2025, oversized sharpie in hand, President Trump signed into law the “One Big Beautiful Bill Act” (OBBB),[1] endeavoring to make good on his pledge. While the end result falls short of fully delivering on his campaign-trail promise, the OBBB nevertheless contains significant benefits for some workers.
What Is It?
With respect qualifying tips, effective Jan. 1, 2025, workers who “customarily and regularly receive tips” may deduct up to $25,000 in tips from their income subject to federal income tax. Employers must report the employees’ tips on Form W-2 and on Form 1099 for nonemployees.
As it relates to taxes on overtime, the OBBB permits employees to deduct up to $12,500 in overtime pay from their taxable income on federal tax returns. Employers must report overtime wages on Form W-2 and on Form 1099 for nonemployees.
The OBBB’s restrictions on tips and overtime taxes expire Dec. 31, 2028.
How Does It Work?
For those hoping for an immediate increase in take-home pay, the OBBB will likely disappoint – it does not change what employees are paid, only what they are taxed.
Employers will continue to withhold federal taxes from employees’ overtime wages and tips. When employees file their 2025 tax returns however, employees who claim deductions for earned tips and overtime wages stand to see a reduction in their taxable wages and/or a corresponding increase in their tax refund.
The benefits are available to all qualifying workers, including those who do not itemize deductions. It can be claimed in addition to the standard deductions.
For employees whose adjusted gross income exceeds $150,000 ($300,000 for joint filers), the OBBB’s benefits are reduced $100 for each $1,000 the taxpayer’s income exceeds $150,000 ($300,000 for joint filers).
Furthermore, OBBB’s tax benefits are capped at $12,500 for overtime and $25,000 for tips. The benefit is not extinguished for those whose tips and overtime exceed these thresholds, but anything above those limits is fully taxed.
Who Benefits?
All employees who work overtime and those who “customarily and regularly receive tips” stand to benefit from OBBB’s tips and overtime provisions.
The OBBB’s tax breaks will have the largest impact on high-income employees who earn significant tips and overtime. Police officers, firefighters, laborers and other employees with modest-to-high base salaries and who routinely work overtime could experience significant relief from federal taxes on their overtime income. Firefighters who earn a $90,000 salary and $15,000 in overtime wages will now pay federal income tax on $92,500 of their annual income instead of the $105,000 they earned. Similarly, high-end restaurant employees who “customarily and regularly receive tips” may also experience considerable benefits.
For lesser-compensated employees, the OBBB’s benefits are more limited. While such employees would still be permitted to deduct earned overtime and tips, standard deductions already reduce their federal taxes to the point where the OBBB’s provisions may increase their tax refunds by just several hundred dollars or less.
OBBB’s Limitations
While the OBBB contains significant advantages for some workers, it falls well short of Trump’s promise of “no taxes” on tips and overtime. Among the law’s limitations are the following:
As noted above, all tips in excess of $25,000 and overtime wages of over $12,500 are fully taxable.
As also noted above, the OBBB’s deductions are available in full for workers with adjusted gross income under $150,000 ($300,000 for a joint filers), but phase out by $100 for every $1,000 over these thresholds.
The OBBB does not affect state tax laws. Employees will still owe state income taxes on all earned overtime and tips.
The OBBB has no effect on Social Security and Medicare taxes.
The OBBB defines qualified overtime as “overtime compensation paid to an individual required under section 7 of the FLSA that is in excess of the regular rate at which such individual is employed.” The OBBB’s provisions do not apply to overtime premiums required under state laws or collective bargaining agreements (unless such premiums also qualify as FLSA overtime).
Only employees “customarily and regularly” receiving tips
as of Dec. 31, 2024, may seek to exempt their tips from federal tax. The OBBB makes clear it does not apply to employees in traditionally untipped roles and does not seek to expand the definition of traditionally tipped employees.
Only tips that are “voluntary, customer-determined, and non-negotiated” qualify.
Open Questions
The OBBB is new for 2025 and as expected, it begs numerous questions. Among those to be answered are as follows:
Although a handful of states have (or are proposing to) enact legislation exempting tips and overtime from state taxes (Wisconsin is not among them), it is unclear whether other states will follow suit.
The OBBB does not define those professions that qualify as “traditionally tipped” such that employees in such roles may seek the OBBB’s benefits. Per the OBBB, the treasury secretary has until Oct. 2, 2025, to publish an official list.
For 2025, the OBBB allows businesses to report approximations of qualified tip and overtime amounts, but what if the approximation is lower than the actual tips or overtime the employee earns? Can the employee supplement this information to take a larger deduction?
Will increasing the value of tips and overtime earnings lead to a rise in employment litigation? Employees may now be more likely to pay close attention to their tips and overtime and thus more likely to discover (or suspect) payment violations.
Will plaintiff’s lawyers adjust how settlement agreements allocate lost wages to take advantage of these new deductions?
These are just some of OBBB’s impacts on tips and overtime. There are others. And while far from the elimination of overtime and tip taxes Trump promised, the law nevertheless creates meaningful benefits for workers worth noting.
This article was originally published on the State Bar of Wisconsin’s
Labor & Employment Law Section Blog. Visit the State Bar
sections or the
Labor & Employment Law Section webpages to learn more about the benefits of section membership.
Endnote
[1] H.R. 1, 119th Cong. (2025-2026).
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