One Big Beautiful Bill (OBBB) Act: Tips and Overtime

March 13, 2026

On July 4, 2025, the One Big Beautiful Bill (OBBB) Act was signed into law. It includes two temporary provisions that may reduce federal income tax for certain workers for tax years 2025 through 2028. 

One quick clarification up front: despite the headlines, these are income tax deductions, not a complete exemption. Tips and overtime may still be subject to Social Security and Medicare taxes, and state and local tax treatment can differ. 

1. Deduction for qualified tips 

Eligible employees (and, in some situations, certain self-employed individuals) may be able to deduct up to $25,000 of qualified tips per year for 2025 through 2028.  

In general, qualified tips include voluntary cash tips, charged tips, and tips received through tip sharing or a tip pool, as long as they are earned in an occupation where tipping was customary before 2025. 

Mandatory service charges (for example, an automatic gratuity a customer cannot change) generally do not qualify.  

Income limits apply:

the deduction begins to phase out when modified adjusted gross income exceeds $150,000 (single) or $300,000 (married filing jointly), and it phases out completely at $400,000 (single) or $550,000 (joint). 

Other requirements may apply, including having a valid SSN on the return and (if married) generally filing jointly. 

2. Deduction for qualified overtime compensation 

Eligible workers may be able to deduct up to $12,500 of qualified overtime compensation per year (or $25,000 for married filing jointly) for 2025 through 2028.  

This deduction generally applies to the overtime premium portion required under the Fair Labor Standards Act (for example, the extra portion in time-and-a-half), not your regular hourly wages. 

Income limits apply: the phaseout begins when modified adjusted gross income exceeds

$150,000 (single) or $300,000 (joint), and it phases out completely at $275,000 (single) or $550,000 (joint). 

Practical note for 2025 returns (filed in 2026) 

Because 2025 is the first year these deductions apply, some payroll forms may not clearly separate “qualified” tips or “qualified” overtime due to transition rules. If nothing else, this is a good year to hang on to your pay records. 

If you think you may qualify, we recommend: 

• Save year-end paystubs and year-to-date payroll summaries (especially for overtime calculations). 

• If you earn tips, keep a simple tip log and confirm tips were properly reported (Form W-2 or Form 1099, and Form 4137 when applicable).  

• Employers: check with your payroll provider about tracking and reporting qualified tips and qualified overtime compensation going forward.