Signed into law on July 4, 2025, as Public Law 119-21, the One, Big, Beautiful Bill (OBBB) brings new responsibilities for businesses whose employees work overtime, or earn tips. The bill allows such employees to potentially reduce their year-end federal income tax liability when they file their taxes for tax years 2025–2028. But this above-the-line deduction only applies to Federal Income Tax, and not all overtime or tip income is eligible.
Below, you'll find articles detailing what's required by employers, with federal resources to guide you through determining what overtime and tip wages are eligible for this deduction.
Watch: One Big Beautiful Bill Overview
Join OnPay contributor Noel Lorenzana, CPA, as he breaks down employee tip and overtime deductions that come with the One Big Beautiful Bill (H.R.1), which became law on July 4th, 2025.
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Overtime
No tax on overtime: FIT deduction on qualified overtime
"No tax on overtime" is a federal income tax deduction introduced in the One, Big, Beautiful Bill. It allows non-exempt workers who work over 40 hours in a week to reduce their year-end federal income tax liability (up to $12,500 for single filers, $25,000 if filing jointly) when they file their taxes.
Entering OBBB qualified overtime during a pay run
For employees to be able to claim a deduction on qualified overtime income, employers are required to report qualified overtime on each employee's pay stub, as well as on year-end forms.
Tips
No tax on tips: FIT deduction on qualified tip income
"No tax on tips" is a federal income tax deduction introduced in the One, Big, Beautiful Bill. The deduction allows tipped employees to reduce their year-end federal income tax liability (up to $25,000 per individual) when they file their taxes.
Entering OBBB qualified tips during a pay run
For tipped employees to be able to claim a deduction on qualified tips earned, employers are required to report qualified tip amounts on each employee's pay stub, as well as on year-end forms.
Federal resources
One, Big, Beautiful Bill provisions
The One, Big, Beautiful Bill has a significant effect on federal taxes, credits and deductions. It was signed into law on July 4, 2025, as Public Law 119-21. These provisions went into effect in 2025.
Treasury, IRS issue guidance listing occupations where workers customarily and regularly receive tips under the One, Big, Beautiful Bill
The Department of the Treasury and the Internal Revenue Service define "qualified occupations" that customarily and regularly receive tips and define “qualified tips” eligible taxpayers may claim as a deduction. The proposed regulations list nearly 70 separate occupations of tipped workers, from bartenders to water taxi operators.
Treasury, IRS provide guidance for individuals who received tips or overtime during tax year 2025
Notice 2025-69 clarifies for workers how to determine the amount of their deduction without receiving a separate accounting from their employer for cash tips or qualified overtime on information returns such as Form W-2 or Form 1099, as those forms remain unchanged for the current tax year. It also provides transition relief to workers who receive tips in the course of a specified service trade or business.
Questions and answers about the new deduction for qualified overtime compensation
This Fact Sheet provides answers to frequently asked questions (FAQs) about the new deduction for qualified overtime compensation, such as who may be eligible to claim the deduction, including federal employees, and where to find supplemental information on eligibility and other rules.
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