Limited Guidance on “No Tax on Tips” and “No Tax on Overtime” Deductions

On September 22, 2025, the U.S. Department of the Treasury and the IRS issued proposed regulations for the “No Tax on Tips” deduction passed under the OBBB Act, and on October 23, 2025, Treasury Assistant Secretary for Tax Policy Kenneth Kies indicated that more guidance is forthcoming, despite the government shutdown.

Both the tips and overtime deductions are available to eligible employees who itemize their deductions, as well as those who do not itemize and take the standard deduction. They apply only to individual income taxes, not Social Security or Medicare taxes.

“No Tax on Tips” Deduction.

The “No Tax on Tips” provisions, enacted with OBBB Act, allow employees and self-employed individuals to deduct up to $25,000 of “qualified tips” they received in a year, per return. Eligible employees may claim the deduction on their 2025 tax return.

The deduction phases out for employees when modified adjusted gross income (MAGI) exceeds $150,000 (or $300,000, if filing jointly). Additionally, for self-employed individuals, the deduction may not exceed the individual’s net income (without taking into account the deduction) from the trade or business in which the tips were earned.

• “Qualified Tips”: Under the proposed regulations, “qualified tips” are tips received from customers or from a tip pool and which are paid in the form of cash or cash equivalent (check, gift card, credit card). “Qualified tips” do not include service charges, automatic gratuities, and other mandatory amounts added to a customer’s bill.
• Occupational Requirements: The proposed regulations identify specific occupations that “customarily and regularly” received tips before 2025, limiting the deduction to individuals in those occupations. These occupations primarily include categories such as beverage and food service, entertainment, hospital, home services, personal services and transportation and delivery.
• No Tip Deduction for Specified Service Trades or Businesses: Special rules disallow the tip deduction for individuals who otherwise meet the occupational requirement if they operate in “specified service trades or businesses,” including the fields of health, law, accounting, performing arts, consulting, and financial services.

For example, a musician may meet the occupational requirements for the “No Tax on Tips” deduction if the musician “customarily and regularly” received tips before 2025. If the musician performs in the lobby of a hotel, which is not a specified service trade or business, then the musician can deduct qualified tips received from hotel guests, but if the musician performs in the symphony, a performing arts specified service trade or business, then the musician cannot deduct tips, even if the musician otherwise met the occupational requirements.

• Reporting: Tips must be reported on Forms W-2, 1099 or 4137. Employers and other service recipients must file information returns with the IRS (or SSA) and furnish statements to employees showing certain cash tips received and the occupation of the tip recipient.

“No Tax on Overtime” Deduction.

The “No Tax on Overtime” provisions allow employees to deduct “qualified overtime” income beginning in 2025. The Department of the Treasury and the IRS have not yet issued proposed regulations for the overtime deduction provided for in the OBBB Act but have indicated that guidance will be issued shortly.

• “Qualified overtime”: Under the OBBB Act, “qualified overtime” is defined as overtime paid to an individual, required under Section 7 of the Fair Labor Standards Act of 1938 (“FLSA”), and in excess of the regular rate at which the individual is employed. This portion is typically known as the “premium” portion of overtime pay. For an employee whose regular hourly pay is $10/hour, with overtime pay at time and a half, only the $5/hour premium portion is eligible for the tax deduction. The deduction is limited to qualified overtime paid to non-exempt employees under the FLSA who work for more than forty (40) hours per week at a rate not less than time and half of their regular rate of pay.
• Ineligible Pay: Pay which is not eligible for the overtime tax deduction includes:
  • The portion of any overtime pay that the employee regularly earns for working the employee’s normal hours (i.e., straight time pay portion of overtime pay).
  • Any overtime or double time required only under state law, required by a collective bargaining agreement, or paid voluntarily by an employer.
  • Qualified tips.
• Reporting: Employers and other service recipients are required to file information returns with the IRS (or SSA) and furnish statements to employees showing the total amount of qualified overtime compensation paid during the year.