No More Federal Taxes on Tips and Overtime Pay (2025–2028): What Workers Need to Know

Big Tax Changes: No Federal Taxes on Tips and Overtime Pay Until 2028

Great news for workers in the United States! A new law called the "One Big Beautiful Bill Act" (OBBBA) has been passed, bringing significant tax changes that could benefit many employees. One of the most notable changes is the elimination of federal income taxes on tips and overtime pay through 2028. Let's break down what this means in simple terms.

What Are Tips and Overtime Pay?

Tips: Extra money given by customers to workers for good service, common in jobs like restaurants, salons, and hotels.

Overtime Pay: Additional pay earned when employees work more than their regular hours, usually over 40 hours a week.

What's Changing with the New Law?

Under the new law, starting in 2025 and lasting through 2028:

No Federal Income Tax on Tips: Workers can deduct up to $25,000 of tip income from their taxable income each year.
No Federal Income Tax on Overtime Pay: Employees can deduct up to $12,500 of overtime pay from their taxable income annually.

These deductions apply to individuals earning less than $150,000 per year or $300,000 for married couples filing jointly.

When Does This Start and End?

Start Date: January 1, 2025
End Date: December 31, 2028

This means workers can enjoy these tax benefits for four years.

Who Benefits the Most?

This change is especially helpful for:

Hospitality Workers: Servers, bartenders, and hotel staff who earn a significant portion of their income from tips.
Healthcare Workers: Nurses and support staff who often work overtime hours.
Retail Employees: Workers who may receive tips or work extra hours during busy seasons.

Why Was This Change Made?

The goal is to put more money into the pockets of hardworking Americans. By eliminating federal income taxes on tips and overtime pay, the government aims to:

Increase Take-Home Pay: Allow workers to keep more of the money they earn.
Boost the Economy: Encourage spending and saving by increasing disposable income.
Support Working Families: Provide financial relief to those who often rely on tips and overtime to make ends meet.

Important Considerations

Payroll Taxes Still Apply: While federal income taxes are eliminated on tips and overtime, Social Security and Medicare taxes still apply.
Reporting Requirements: Employers must accurately report tip and overtime income on W-2 forms.
Income Thresholds: The deductions phase out for individuals earning over $150,000 and couples earning over $300,000.

What Should Workers Do?

Keep Accurate Records: Track all tips and overtime hours to ensure proper reporting.
Consult Tax Professionals: Seek advice to maximize benefits and ensure compliance with tax laws.
Stay Informed: Keep up-to-date with any changes or updates to tax laws that may affect your income.

Potential Impact

This tax change is expected to:

Increase Disposable Income: Workers will have more money to spend or save.
Stimulate Economic Growth: Higher spending can boost local economies.
Improve Financial Stability: Reduced tax burdens can help families manage expenses more effectively.

Conclusion

The elimination of federal income taxes on tips and overtime pay through 2028 is a significant change aimed at supporting hardworking Americans. By understanding and utilizing these new tax benefits, workers can enhance their financial well-being over the next four years.