No Taxes on Overtime: What Businesses Should Know Updated (Nov. 2025)

In July 2025, the president’s campaign promise of “no tax on tips” and “no tax on overtime” took real shape with the signing of H.R. 1, a federal tax law that added new deductions for eligible workers. Since then, both employees and employers have been trying to understand what this actually means in practice, which forms are affected, and how to stay compliant while the rules are still evolving.

The IRS started issuing early guidance in September, including a draft list of covered occupations for the tips provision. On Nov. 4, the agency followed up by labeling 2025 as a transition year, giving employers breathing room on reporting penalties while everyone adjusts.

Below is a practical walkthrough of what is currently known so you can start planning—without assuming the law does more (or less) than it really does.

Is There a Specific Form to File for the Deduction?

For individual taxpayers, the IRS has released a draft Schedule 1-A that is expected to be used to claim several new deductions when people file their 2025 tax returns.

The form is still in draft status and could change if Congress or the IRS adjusts the rules. One early source of confusion has been how qualified overtime is shown on the W-2. The box referenced on Schedule 1-A is the same box used for total taxable wages and tips, not a separate box that isolates only the portion that qualifies for the overtime deduction. That makes it harder for employers to break out the number the way the new law ideally envisions.

In November, the IRS acknowledged that employers may not have complete information for the period beginning when the law took effect in July 2025. As a result, for Tax Year 2025, employers will not be penalized if they are unable to report the full amount of:

• Qualified overtime compensation, and
• Reasonably designated cash tips.

Even with penalty relief, the IRS is urging businesses to do what they realistically can:
assign accurate occupation codes, track cash tips and overtime pay as clearly as possible, and give employees enough detail to help them claim any deductions they are entitled to when they file.

Once finalized, Schedule 1-A is expected to support several deductions, including:

• Qualified tip income
• Qualified overtime pay
• Certain car loan interest (for loans taken in 2025 to buy a new car assembled in the U.S.)
• Enhanced deduction for some seniors age 65+, with a phase-out starting at $75,000 gross income for single filers

All of these are designed as below-the-line deductions. That means they reduce taxable income, not adjusted gross income (AGI). Existing income thresholds and brackets in the federal tax law continue to apply.

Will Employee Checks Be Bigger With No Taxes on Tips and OT?

In the short term, most employees will not immediately see larger paychecks just because this new law exists.

For 2025, there is no special adjustment built into the federal Form W-4 to reflect these new deductions. That means employers will continue to withhold:

• FICA taxes (Social Security and Medicare),
• Federal income tax based on the employee’s bracket, and
• Any state or local income taxes, where applicable.

Employees still pay these taxes on tip income and overtime pay throughout the year.

The first real chance for the law to influence paycheck size is 2026. A draft 2026 Form W-4 already includes changes that factor the new deductions into the deduction worksheet. Once the 2026 W-4 is finalized, employees who complete a new W-4 and account for expected tip and overtime deductions may see lower federal income tax withholding. That can translate into slightly larger net pay each period.

Until then, most of the benefit will be felt at tax filing time, not in ongoing payroll.

Are “No Taxes on Tips and OT” a Tax Deduction or a Tax Credit?

The law does not eliminate tax on tips and overtime in real-time payroll. Instead, it creates tax deductions that can be claimed on an individual’s tax return.

These deductions are taken against gross income when filing taxes, and they reduce taxable income, which in turn lowers the final tax bill according to the person’s marginal tax bracket.

For example:

• An employee in the 24% bracket who qualifies for a $5,000 deduction might reduce their tax bill by roughly $1,200 (assuming that entire $5,000 is taxed at the 24% rate).

So, employees can see tax savings or a larger refund, but it doesn’t mean zero tax on the underlying tips and overtime. The money is still taxed during the year; the deduction works as a partial relief when the tax return is filed.

Are There Limits on How Much Tips and OT Can Be Claimed?

Yes. The law sets caps and phase-outs that limit how much tip and overtime income can be used for the deduction.

• Qualified tips:
  From 2025 through 2028, individuals can generally deduct up to $25,000 per year in qualified tip income from their federal taxable income.
• Phase-out for higher incomes:
  For individuals, the deduction starts to phase out once adjusted gross income reaches $150,000. For married couples filing jointly, the phase-out begins at $300,000. The phase-out is structured so that the deduction is reduced by $100 for every $1,000 of income above the threshold.
• Qualified overtime:
  The annual deduction limit tied to overtime pay is $12,500 for individuals and $25,000 for joint filers. The same $150,000 / $300,000 AGI thresholds apply here as well and gradually reduce the benefit for higher-income taxpayers.

Any tips or overtime income above those caps are still taxable in the usual way.

What Jobs Qualify for No Tax on Tips?

On Sept. 3, 2025, the U.S. Treasury Department released a preliminary list of nearly 70 occupations that customarily receive tips (as of Dec. 31, 2024) and may qualify under the new law.

The list includes familiar tipped roles such as:

• Food and beverage work (bartenders, servers, and related roles)
• Gaming and casinos (dealers and similar positions)
• Entertainment staff (for example, DJs and ushers)
• Hospitality and guest services (such as bellhops and concierge roles)
• A broader set of modern service jobs, including influencers, digital content creators, rideshare and delivery drivers, and similar occupations where tipping is common

Because this list is still preliminary, the Treasury and IRS may adjust which occupations are included as more guidance is released.

There is also an open question around situations where a gratuity is automatically added to a bill. The law says that tips must be paid voluntarily and determined by the payor, which raises the issue of whether automatic service charges qualify. Employers should watch for future guidance that clarifies how these automatic charges are treated.

How Will Tips and Overtime Be Accounted for on Tax Forms?

For Tax Year 2025, the IRS has stated that existing federal forms and withholding tables stay in place. That means:

• Form W-2
• Forms 1099
• Form 941
• Standard withholding tables

will continue to be used as they are today. A updated Form W-2 draft has been issued, but it applies to Tax Year 2026, not 2025.

Employers still need to:

• Report tips,
• Provide occupation information, and
• Indicate qualified overtime amounts as required once the rules are finalized.

For businesses that already claim the FICA tip credit, the new law modifies the Internal Revenue Code by expanding which tips are eligible. It is no longer limited solely to food and beverage service; it can also include tips in beauty and personal care services such as barbers, hair stylists, and nail technicians.

There is also a technical concern about tipped employees who also work overtime. Employers will need guidance to avoid double-counting or “double-dipping” when they calculate both the new deduction and existing credits.

What Are the Eligibility Rules for Claiming No Tax on Overtime?

Beyond income caps, several eligibility conditions apply to the overtime portion of the deduction:

• The benefit is aimed at W-2 employees, not independent contractors. A properly classified 1099 worker does not meet the definition of a covered employee under the Fair Labor Standards Act (FLSA), which is the law referenced for “qualified overtime” in this provision.
• Some of the statutory language mentions 1099 workers in the reporting context, but that is about the difference between how the FLSA and the IRS define independent contractors—not about extending the overtime deduction to contractors.
• Individuals cannot claim the deduction if they file as Married Filing Separately.
• The employee must have a valid Social Security number.
• The overtime worked must be overtime required under FLSA, not just any higher rate of pay.
• Only the “half” portion of time-and-a-half (the premium over the regular hourly rate) is considered for the “qualified overtime” deduction.

The annual cap for overtime deductions remains $12,500 per individual and $25,000 for married couples filing jointly. Overtime pay above those amounts remains fully taxable.

The IRS still needs to provide more detail on exactly how “qualified overtime compensation” will be defined in practice, and how Form W-4 will evolve to reflect these rules, especially given the transition relief in 2025.

From 2025 to 2028, individuals who receive qualified tips may deduct up to $25,000 annually from their federal taxable income, while qualified overtime pay is capped at $12,500 for most filers ($25,000 for joint filers). These limits and phase-outs are detailed in
official IRS guidance for individuals who received tips or overtime in 2025.

How Could State Tax Filing Be Impacted?

The federal law does not automatically control state income tax rules, so employers and employees must pay close attention to state-level treatment of tips and overtime.

For example, as of 2025:

• In California, employees must continue to treat all tip and overtime income as taxable for state purposes. There is no matching state-level deduction mirroring the federal one at this time.
• Employers in California must take care to distinguish federally qualified overtime from overtime owed only under state law. California rules can require overtime after more than eight hours in a day, but only the portion that is overtime under FLSA may qualify for the federal deduction. That means the overtime a worker earns between 8 and 12 hours in a shift may not always qualify for the federal deduction if that overtime is driven only by state requirements.

States can also choose a different approach entirely. In Colorado, for instance, a law passed in May 2025 decouples state taxes from this federal overtime/tips deduction. Colorado requires all overtime pay—including amounts that might qualify for the federal deduction—to be included in taxable income at the state level.

Other states may decide to conform to the new federal rules or to adopt their own treatment. Employers and employees should expect a patchwork of state responses and make sure their payroll and tax processes reflect both federal and state law.

Final Thoughts

The “no taxes on tips and overtime” promise has translated into new federal deductions, not a simple switch that makes tip and overtime income tax-free in real time. It is also layered with transition relief, draft forms, and evolving guidance.

For employers, the practical steps right now are to:

• Track tips and overtime as accurately as you can,
• Capture occupation data that may be needed on forms,
• Understand the federal caps and phase-outs, and
• Watch for additional IRS and Treasury guidance, especially on Schedule 1-A, W-4 changes, and 2026 forms.

For employees, the main impact will show up at tax filing time, and potentially in 2026 paychecks once new W-4 instructions are in place.

Because this law interacts with the FLSA, state wage and hour rules, and state tax codes, businesses should coordinate with their payroll provider, HR, and tax advisors to stay aligned with both federal and state requirements as the rules continue to evolve.