Hailey Whitlock, Staff Writer 

On July 3, 2025, the One Big Beautiful Bill was passed and with it came provisions that sparked interest among tipped and overtime workers. President Trump largely ran on a platform that advocated for no tax on tips and with the passage of the bill, it would seem that this concept came to fruition. However, the policies are not quite as simple as no tax on tips or overtime. 

Before explaining the inner workings of the no tax on tips policy, it is essential to establish a core understanding of how taxes work. When filing taxes, the taxpayer can choose either the standard deduction (the same for everyone in the same filing status, such as single or those who are married and filing jointly) or the itemized deduction (becoming more rare as the standard deduction is raised). For instance, if the standard deduction for a single taxpayer is $15,750 and this is higher than the itemized deduction, this number would be deducted before computing taxable income (which is then charged progressively at the tax rate). If they made $60,000, they would only pay tax on $44,250. The no tax on tips policy also works as a deduction reducing the amount of taxable income. 

For those who are making less than $150,000 a year filing single or less than $300,000 a year filing jointly, the taxpayer is entitled to a tax deduction of up to $25,000 if their tips exceed this amount. For instance, if the above worker made $30,000 of their income from tips, they could take the full tip deduction of $25,000 from the already reduced $44,250. This would mean they would only pay tax on $19,250, potentially saving quite a bit of money. 

However, there are a few caveats to this deduction. To begin, this is only eligible for those making under $150,000 filing single or $300,000 filing jointly. Per New Way Accounting, for those above this bracket, the deduction phases out until $400,000 for filing single and $550,000 for filing jointly. In addition, to qualify, the taxpayers must work in a field which customarily and regularly receives tips as defined by the Treasury Department. This income must be claimed before this deduction can be taken. While this does reduce the federal tax liability, workers are still responsible for local and state taxes. Finally, this provision is only in place until 2028, although this could be extended. 

While this does seem like a massive advantage that could help large numbers of Americans save  on their taxes, it is also important to acknowledge the scope of the population influenced by this policy. Per Fortune, only about 2.5% of Americans fall in the category of tipped workers. Further, of these workers, about 40% of tipped workers already don’t pay federal taxes on their tips per Meg Wheeler, certified public accountant and founder of the Equitable Money Project. The reason many of these workers do not pay federal tax on tips is that their income is below the standard deduction, meaning they should not have to pay federal income tax. 

In regard to no tax on overtime, this comes with a deduction of up to $12,500 for a single filer or up to $25,000 for those filing jointly. According to Forbes, for overtime to qualify, it must align with the standards explained under the Fair Labor Standards Act, one of which includes employees being paid time and a half for work exceeding 40 hours in a week. In addition, the deduction can only be claimed for the pay that is above the typical rate. For instance, if a worker makes $20 an hour typically and $30 an hour for overtime (time and a half), the deduction could only count for $10, the amount paid in excess of the typical wage. 

The above policies spark questions about if companies will adjust their compensation structures to better take advantage of the deductions (especially if they are extended beyond 2028). For instance, companies that traditionally pay a salary may instead pay low hourly base pay with significant overtime. In addition, this could cause a further shift towards tipping as companies and workers take advantage of these benefits. If new workers are driven into tip fields, the companies may lower base hourly salaries even further, relying on the tips (and the reduction in taxes the worker would have to pay) to cover the difference. 

Overall, the no tax on tips and overtime policies are much more complex than simply not paying any taxes on these types of income. Instead, these deductions depend on income earned, as well as if the income source is qualified and are still subject to taxes other than federal income tax. This article provides only a surface level introduction of some of these complex topics and the influence they could have in the compensation structures of the future.