Changes to Tax Regulations for Workers
Millions of workers in the US might soon see changes regarding federal tax deductions on tips and overtime pay when filing for the 2025 tax year. However, a clear outline of which workers will be eligible for these deductions needs to be finalized by the government following President Trump’s recent spending and policy package approval from Congress.
As per the signed bill, the US Treasury is expected to provide a list of qualifying occupations for tax-free tips by October 2nd. Moreover, guidance related to reporting overtime payments and necessary documentation will also be shared. This tax deduction isn’t a permanent change—it is set to expire after the 2028 tax year.
Currently, overtime pay doesn’t appear separately on employee W-2 forms, although employers usually manage to track and display it on pay stubs. Miguel Burgos, a CPA at TurboTax, pointed out that despite upcoming changes, employers still have to withhold taxes until further instructions are available. Notably, this legislation won’t affect state or local taxes, nor will it influence federal taxes like Social Security and Medicare.
So, who qualifies for these tax-free tips? According to the bill, eligible workers are those who regularly received tips by December 2024. In fact, the National Restaurant Association indicates that 2.1 million bartenders and servers fall into this category. Other expected groups include barbers, hairstylists, nail technicians, and delivery drivers. To qualify, workers need to provide their Social Security number on their tax filings—if filing jointly with a spouse, the spouse’s number is also required.
Workers can deduct tips up to $25,000 if their income is below $150,000 (or $300,000 for married couples). For earnings above this threshold, every extra $1,000 decreases the deductible amount by $100.
As for who stands to benefit the most from this change, it appears that around 40% of workers already pay little or no income taxes, so the effect may be minimal for them. Conversely, the remaining 60% might see an average annual tax cut of about $1,800.
Both cash and credit card tips are included under this new regulation. Tips distributed amongst employees will count, but servers may be less inclined to share tips due to an incentive not to participate in pooled arrangements. Importantly, the ruling specifies that eligible tips must be voluntarily given, excluding automatic charges for large parties.
Moreover, Yale’s Budget Institute has found that about 8% of hourly workers and 4% of salaried employees are regularly compensated for overtime based on the Fair Labor Standards Act. Jobs such as teachers, clergy, and executives are usually not covered by federal overtime rules.
When it comes to deducting overtime, workers will be able to claim up to $12,500 individually (or $25,000 for joint filers). Just like tips, this available deduction will decrease for those earning above $150,000. Again, a Social Security number is necessary when filing.
The White House Council of Economic Advisors estimates that the average worker might see annual tax reductions between $1,400 and $1,750. Overall, tax-free tips may lead to a $31 billion drop in federal revenue from 2026 to 2029, while tax-free overtime could reduce revenue by $90 billion during the same timeframe, according to the Nonpartisan Tax Policy Center.
