Originally published 8/12/2025:

In July 2025, the Trump Administration’s signature budget bill became law as Public Law 119-21.  Of note for employers and employees, the bill permits tax deductions for “qualified tips” and a portion of overtime pay, as detailed in this IRS Fact Sheet. 

Tax Deduction on Qualified Tips: Retroactive to January 1, 2025, and through 2028, employees and self-employed workers may deduct “qualified tips” that are received in the course of jobs that “customarily and regularly receive tips on or before December 31, 2024 and that are reported on Form W-2 by their employer, Form 1099 by the contracting company, or other tax reporting statement provided by the individual. To encourage employers to report all received tips, there is a requirement that employers must report the “qualified tips” on a Form W-2 or similar reporting form for employees to be able to deduct the tips.  “Qualified tips” are those cash or charged tips received voluntarily from customers or through tip sharing; they do not include mandatory or preset tips for larger tables or service charges. The maximum annual deduction is $25,000 for employees and, for self-employed workers, may not exceed their net income from the work in which the tips were earned. The deduction phases out for taxpayers with a modified gross income over $150,000 ($300,000 for joint filers).

Tax Deduction on a Portion of Overtime Pay: Retroactive to January 1, 2025, and through 2028, individuals who receive “qualified overtime pay” may deduct the portion that exceeds their regular rate of pay as required by the Fair Labor Standards Act and that are reported on Form W-2 by their employer, Form 1099 by the contracting company, or other tax reporting statement provided by the individual. Thus, when an employee receives time-and-a-half for overtime, only the “half” portion may be deducted. Further, overtime pay not required under the FLSA, such as overtime required only by state law, an employee handbook policy, or a collective bargaining agreement may not be deducted. The maximum annual deduction is $12,500 ($25,000 for joint filers). The deduction phases out for taxpayers with a modified gross income over $150,000 ($300,000 for joint filers).

Employers are advised to consult with their payroll administrators to ensure that employee tips and overtime are adequately tracked and reported.

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