Employment Law Report
The Legal Ramifications of No Tax on Overtime and Tips: What It Means for the Workforce
Written by: Tyson Gorman with assistance from Colin Flood, Wyatt Summer Associate
On July 4, 2025, President Trump signed into effect the One Big Beautiful Bill Act which allowed for new tax exemptions for employees who receive tips or work overtime.
Background
In July of 2025, the United States Congress passed a major piece of tax reform legislation known as Trump’s “Big, Beautiful Bill.” The bill aimed to address several key areas of the economy, with a focus on taxation for businesses and workers alike. Among its many provisions, two areas that garnered significant attention were overtime pay and tip taxation, both of which have broad implications for the workforce, especially in service industries and industries that require more than the average 40-hour workweek. The new exemptions will remain intact until the year 2028 unless extended by Congress.
Impacts on Overtime Pay
The impacts on overtime pay are not as cut and dry as they may seem. Workers who work overtime will be able to deduct up to $12,500 of overtime pay from taxable income on their federal tax returns. However, there will not be a boost in immediate take-home pay since taxes will still be deducted from their paychecks. Nevertheless, these deductions can benefit workers by lowering the overall tax debt or by increasing the amount of a tax refund. The Bill is now in effect and retroactive to January 1, 2025.
To be eligible for tax exemptions on overtime pay, a worker must have a work-eligible Social Security number. Furthermore, employees will still be taxed at their normal rates they make during overtime hours; only the “half” portion of “time and a half” will be tax-exempt.
Exempt employees, as defined by the Fair Labor Standards Act, will not benefit from the new tax exemption since they are not paid at a higher rate for hours worked in excess of 40 hours in a workweek. Additionally, individuals who have a gross income over $150,000 (or jointly $300,000) will have their amounts of deduction reduced by $100 for every $1000 of income above the thresholds. Also, nothing in the new bill makes overtime wages exempt from FICA taxes or local and state income taxes.
Impact on Tip Taxation
For tip taxation, the new guidelines are similar to those for overtime pay. Workers who receive tips will be able to deduct up to $25,000 in reported tips from their taxable income on their federal tax returns. As with the overtime change, there is no immediate boost to an individual’s take-home pay, but the change will come to bear when the employee files the tax return.
The new tip legislation starts phasing out individuals from the tax exemption who make $150,000 or more in 2025, but this threshold will increase with inflation. Like with overtime pay, employees will need a work-eligible Social Security number to receive the tax exemption for tip income. Along with that, the provision only allows “certain lines of business” to utilize the new tax exemption, referring to food service and cosmetics industries specifically who “customarily and regularly receive tips.” What’s more, state and local income taxes on tips will still apply in states where applicable, along with the deduction of FICA taxes.
Implications on Employers
The new tax exemptions have several impacts on employers. Employers will need to track and report overtime hours, tips and tax withholding on each to ensure that the yearly earnings are reported correctly to employees. The reports will have to be completed on Form W-2 for employees and on Form 1099 for non-employees. The new tax exemptions should be navigated carefully to ensure that employers are in compliance with new tracking and reporting of certain wages for tax purposes. Employers with questions regarding the new tax exemption of tips and overtime pay are encouraged to contact a member of Wyatt’s Labor and Employment team.
