Tax season is underway in the US, and this year, there are a few new federal tax deductions that apply for tax years 2025 through 2028.
Two of the new deductions that many Americans and businesses are paying attention to are because of the “One Big, Beautiful Bill” – the Republican budget passed in July 2025. It included No Tax on Tips and No Tax on Overtime deductions and has largely been touted as a win for everyday Americans based on the concept that many will have higher after-tax earnings.
But industry associations, like the Institute of Taxation and Economic Policy, have analyzed how the deductions will play out, and it’s not low-wage workers who will benefit most – or at all – from all of the tax cuts in the bill. What they’ve found is that the richest five percent will receive 45% of the net tax cuts this year.
The number of people specific deductions like no tax on tips and no tax on overtime will actually benefit has led to some concern and skepticism. Numerous possible issues have been identified, from high earners using a loophole to claim less taxable income, to the creation of inequity among workers in the same job, employed by the same company.
They also point to the risk of base income and hourly wages becoming stagnant and that businesses could take advantage of opportunities the deductions create.
Since the No Tax on Tips and No Tax on Overtime deductions impact a wide range of jobs, understanding how they work is important to ensure tax filings are completed properly.
What are the Tips and Overtime Tax Deductions?
If you work in the service industry or in professions that require overtime, there’s no doubt you’ve heard about the new overtime and tip deductions. It was a talking point during Trump’s 2024 campaign, and Republicans are increasingly referring to the budget as the Working Families Tax Cut Bill.
There are certain jobs the no tax on tips deduction apply to, ranging from bartenders and wait staff, to personal trainers and salon workers.
Generally speaking, it applies to qualified tips (voluntary cash or charged tips from customers or received through tip sharing), has a maximum annual deduction of $25,000, and phases out for those with incomes over $150,000 (or $300,000 for joint filers).
No tax on overtime allows certain hourly workers to deduct up to $12,500 (or $25,000 for joint filers) of overtime pay. However, it only applies to federal income tax and overtime pay required under the Fair Labor Standards Act. Deductions apply to “half” of the time-and-a-half pay, and salaried workers do not qualify.
What are the Issues with No Tax on Tips and No Tax on Overtime?
Economists in the US and around the world have weighed in on the new federal tax deductions, and they’ve identified several key issues they expect to see. Much of the harm of no tax on tips and no tax on overtime relate to what employers might do and how the highest paid employees could benefit the most.
Low-Wage Workers Won’t Reap the Benefits
Many low-wage workers who depend on tips as a main source of income already don’t pay federal income taxes because they don’t meet the earnings threshold that requires them to do so. This fact directly contradicts messaging from the administration that non-taxed tips will put money back into the hands of those who need it most.
Other deductions and changes, like raising the federal minimum wage – which hasn’t changed since 2009 – would be more effective at helping low-wage workers.
While some tipped workers expect a tax boon, it’s not believed to be a long-term fix and it will benefit the middle class most. It doesn’t address what’s causing working families to struggle, like lost health insurance and feed programs, higher grocery bills, and the cost of housing.
Hourly Wages Could Become Stagnant, Raises Less Common
No tax on tips could put “down pressure” on hourly wages because of the tax break, and no tax on overtime certainly wouldn’t encourage employers to raise wages or hire more employees. There’s no incentive for businesses to pay employees more when their workers are getting these deductions, and employers may pressure workers into overtime.
Then there’s the risk of businesses taking advantage of the system by rewarding higher earners. Switching well-paid employees from a salary, which doesn’t qualify for overtime deductions, to an hourly wage, means they can get a tax break earning the same income. It would significantly impact how much they pay in taxes – and it doesn’t cost employers anything.
Fosters Employee Inequity
When it comes to no tax on overtime, the impact of the deduction is likely to create employee inequity. The fact is, many workers simply can’t work overtime; they have children they need to care for or other responsibilities after their normal work hours, have health issues that prevent them from working overtime, or have a second job.
The new system rewards some workers but doesn’t account for those who simply can’t work extra hours, ultimately fostering an imbalance among employees in the same job. And then there’s how no tax on overtime encourages people to work more when there’s considerable evidence that long hours hurt the health and happiness of workers, while also decreasing productivity.
Federal Revenue Reduction
Not being taxed on overtime and tips ultimately means annual federal revenue will take a hit, and the American people will suffer the consequences. It also affects state revenue, one of the hidden downsides of the no tax on tips rule.
Less tax collection and largescale tax breaks for the ultra rich results in less money to fund crucial programs and supports across the nation.
It doesn’t seem as if there’s anything being done to counteract these losses; critical programs have already been cut, and others were given a significantly reduced budget, which hurts low-income families the most.
Lost Eligibility of Other Tax Credits
Many workers who the no tax on tip deduction applies to will become exempt from getting other tax breaks, like the Child Tax Credit. American families depend on the CTC and other types of support, but many will no longer qualify for them.
Will Tip and Overtime Deductions Create Legal Issues?
How, exactly, businesses will respond and the steps they take to adjust to the new deductions for tipped workers and those who work overtime is unclear. Unfortunately, numerous issues and loopholes have already been revealed, and top earners and businesses seem to be best positioned to reap the benefits.
But workers have rights, and as the no tax on overtime and no tax on tips plays out this tax season, knowing how to report tips and overtime is one thing workers can control. And if your employer does something you don’t think is legal, pressures you to work longer hours, or withholds tax information or pay, it’s important to reach out to a labor and employment lawyer.
