No tax on tips or overtime? This could be the game-changer your paycheck needs
and overtime: How Trump's new tax law could change your paycheck in 2025-
In a major shift that could impact millions of working Americans, President Donald Trump's new tax bill has officially cleared Congress. Passed by Republicans on Thursday, the bill eliminates federal income tax on tips and overtime pay, fulfilling a major campaign promise Trump made in 2024. The law is set to take effect in 2025 and will run through 2028, providing tax relief for service workers and hourly employees who earn extra by working longer hours.
The bill will be signed into law by President Trump on July 4, a symbolic date highlighting what the White House calls 'a tax independence day' for working-class Americans. But while some workers could see more take-home pay, others — especially those in lower-income brackets — may not see much benefit at all.
How does the 'no tax on tips' rule work?
Under current IRS rules, workers must report all tips over $20 per month to their employers, and those amounts are taxed just like regular wages. But Trump's new tax law changes that. Starting in 2025, employees can deduct up to $25,000 in tip income from their federal income taxes. This means workers won't owe federal income tax on that portion of their tips — although they will still have to pay payroll taxes like Social Security and Medicare.
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The deduction applies even if you take the standard deduction — so you don't need to itemize. That's a big win for many service industry workers.
However, there's an income limit:
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For individual filers, the deduction begins to phase out if their modified adjusted gross income (MAGI) exceeds $150,000.
For married couples filing jointly, the phase-out begins at $300,000.
For every $1,000 over the limit, the deduction drops by $100.
According to Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting, 'An estimated 4 million workers receive tip income — they could be directly impacted by this.'
Also Read:
Big changes ahead! How Trump's Big Beautiful Bill could impact your Income Tax and wallet
What is the new tax break for overtime workers?
The law also eliminates federal income tax on overtime pay, up to specific limits:
$25,000 for married couples filing jointly
$12,500 for single filers and others
As with tips, the deduction phases out at $150,000 for individuals and $300,000 for couples.
That means if you earn overtime in 2025–2028, you'll still see the usual tax withheld in your paycheck — but when you file your taxes, you can deduct the income and get that tax money refunded. Even if you don't itemize deductions, you still qualify.
The White House estimates that the average worker receiving overtime will save between $1,400 and $1,750 per year.
Who actually benefits the most from Trump's tax cut?
While the headlines sound great, not everyone will feel the impact.
A Tax Policy Center study shows that:
Households earning $33,000 or less won't benefit much — many already owe little to no federal income tax.
40% of households that report tip income won't get any tax benefit.
But 60% of households with reported tip income will benefit, saving an average of $1,800 per year.
Among those earning under $33,000, only 1.4% will benefit, with an average annual tax savings of just $450.
So, while the law targets working-class Americans, the biggest gains will likely go to middle-income households — not the lowest earners.
Will small businesses and contractors also benefit?
Yes, but only under certain conditions. Some independent contractors and small business owners may qualify for the deductions, but they must meet strict criteria.
To claim the deduction, business income must exceed deductions, losses, and costs, including the cost of goods sold. The IRS is expected to issue more guidance soon.
This is intended to prevent businesses from restructuring purely to exploit the tax break. However, as Luscombe points out, 'Some businesses may shift toward relying more on tip income and overtime pay to take advantage of these deductions.'
What's the impact on the federal budget and job market?
While many workers may see higher take-home pay, the government will collect less revenue.
According to the Joint Committee on Taxation:
The tip income deduction will reduce federal revenue by $40 billion between 2025 and 2034.
The overtime pay deduction is expected to cost $124 billion through 2028.
Some policy experts, including the Tax Foundation, warn the law could distort the labor market. By making overtime more financially appealing, some workers might prefer hourly jobs with overtime potential over salaried positions that don't pay extra for long hours.
There's also concern about whether these benefits truly reach the people who need them most.
Will this tax break really help working Americans?
President Trump's tax law delivers a bold promise: let workers keep more of their hard-earned money. For many in the hospitality, food service, and retail industries, this could mean hundreds or even thousands of dollars in tax savings each year.
But the benefit is not universal. Lower-income workers — the ones most likely to earn tips — may see little change. And the overall impact on the federal deficit and labor market remains a question.
As this new law rolls out in 2025, it's crucial for workers to understand how to report income correctly, track their earnings, and take advantage of the new deductions when tax season comes around.
FAQs:
Q1: What is Trump's new tax law on tips?
Trump's tax law removes federal income tax on up to $25,000 in tip income starting in 2025.
Q2: Who qualifies for the no tax on overtime pay under Trump's new law?
Workers earning overtime can deduct up to $25,000 in income, with limits based on total earnings.
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