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The truth about “no taxes” on tips and overtime

If you earn tips or work overtime, 2025 could bring significant tax savings. New legislation allows qualifying workers to deduct up to $25,000 of tipped income and up to $12,500 of overtime pay ($25,000 for married couples filing jointly) for tax years 2025-2028. 

But here’s the catch: the rules are more complex than they appear, and missing key details could cost you money. At Padgett, we’re staying ahead of these changes as they unfold, monitoring IRS guidance, and preparing to help you navigate these new opportunities.  

Who can and cannot claim these deductions?

For tips: 

• You must work in traditional tipping industries 

• Tips must be voluntary cash or charged tips received from customers or through tip sharing. 

• You must have a Social Security Number and include it on your return.  

• Self-employed individuals in a Specified Service Trade or Business (SSTB) under section 199A are not eligible. Employees whose employer is in an SSTB also are not eligible. 

For overtime: 

• Available to hourly workers who earn overtime pay 

• Must meet the same income requirements as tip deductions. 

Here’s a quick video breakdown from our President, Roger Harris:

The income threshold reality

Here’s where it gets tricky. While you may qualify if your income is under $150,000 (single) or $300,000 (married filing jointly), the deduction doesn’t simply disappear above these amounts. Instead, it phases out gradually. This means even higher earners could still benefit but calculating exactly how much requires careful analysis of your unique situation. 

The business type that could disqualify you 

Whether you’re an employee or self-employed, there’s a crucial factor many people miss: your employer or business cannot be classified as a “Specified Service Trade or Business” (SSTB). 

SSTBs include: 

• Health; 

• Law; 

• Accounting; 

• Actuarial science; 

• Performing arts; 

• Consulting; 

• Athletics; 

• Financial services; 

• Brokerage services; 

• Investing and investment management; 

• Trading or dealing in securities, partnership interests, commodities; or 

• Any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners. 

If you work for or own one of these businesses, you may not qualify – regardless of how much you earn in tips or overtime. 

When will you actually see the savings?

This is the most important part to understand: your weekly paycheck won’t change in 2025. Your employer will still withhold taxes on your tips and overtime as usual. 

The savings come when you file your 2025 tax return in early 2026. That’s when you’ll claim the deduction and potentially receive a larger refund or owe less in taxes. 

What this means right now: Start keeping detailed records of your qualifying tips and overtime income throughout 2025. You’ll need this documentation to help claim the deduction. 

What employers need to know 

If you’re an employer, these changes will bring new responsibilities. You’ll need to: 

• Keep detailed records of qualifying tips and overtime pay 

• Ensure this information is accurately reported on employees’ Form W-2s, beginning in 2025 

Because these deductions are retroactive to January 1, 2025, employers should begin tracking this data now. The IRS will offer more guidance in the months ahead, but for now, a reasonable estimation method is acceptable. Check out this quick video breakdown:

Need help getting your records in order? 

If you’d like to meet with a Padgett advisor to get a better understanding of your business finances and record-keeping practices, we’re here to help. Having solid systems in place now will make it easier to comply with whatever requirements the IRS eventually releases. 

The bottom line

These new deductions could deliver substantial tax savings, but they’re not as simple as “no taxes on tips and overtime.” The qualification rules involve income thresholds, business classifications, and careful documentation.   

The IRS is still developing specific guidance on these deductions, and the details will determine how much you can actually save. At Padgett, we’re monitoring every update and development to ensure our clients understand exactly how these changes affect their unique situations. 

Want to know if you qualify and how much you could save? We’re here to walk through your specific situation and help you prepare for these new opportunities. No pressure, just clear answers about what these changes really mean for your taxes. 

The post The truth about “no taxes” on tips and overtime appeared first on Padgett.