Millions of U.S. workers who earn tips and overtime pay may soon be eligible for a federal tax break when they file their 2025 income taxes, under a new bill signed into law. This initiative requires the U.S. Treasury Department to publish a list of qualifying occupations by October 2, and provide guidance on how to report tips and overtime pay.
Qualifying Workers and Occupations:
- Eligible workers include those who received tips regularly before December 2024.
- Occupations likely to qualify include servers, bartenders, barbers, hairdressers, nail technicians, and delivery drivers.
- Workers must use a Social Security number when filing taxes, and include a spouse’s number if filing jointly.
Deductions for Tips:
- Workers can deduct up to $25,000 in tips if they earn less than $150,000 (or $300,000 for joint filers).
- The deduction decreases by $100 for every $1,000 earned above $150,000.
- Both cash and credit card tips are included, but not service charges.
Tax-Free Overtime:
- An estimated 8% of hourly workers and 4% of salaried workers who regularly receive overtime pay are eligible.
- Workers can deduct up to $12,500 in overtime pay (or $25,000 for joint filers).
- The deduction is also reduced for income above $150,000.
Overall Impact:
- Approximately 60% of tipped workers will benefit, with an average tax cut of $1,800 per year.
- The average overtime worker is expected to see a tax cut between $1,400 and $1,750 annually.
- The initiative is projected to reduce federal revenue by a total of $121 billion from 2026 to 2029.
The provisions are set to expire after the 2028 tax year, and do not affect state, local, or federal payroll taxes. Employers are advised to continue withholding taxes until further guidance is issued.