What Is Trump's Plan for Taxes on Overtime?

President Trump officially signed the landmark One Big Beautiful Bill Act into law on July 4, 2025, marking a significant shift in tax policy. Among its provisions are temporary federal deductions for qualified overtime and cash tips (through 2028), with caps of $12,500 ($25,000 joint filers) for overtime and $25,000 for tips, both phasing out at higher income levels. While the House and Senate differed on eligibility thresholds, the final version signed into law reflects the Senate’s phase‑out structure. These changes take effect for tax year 2025.

A financial advisor can help you assess how these proposals may impact your tax situation and financial planning strategies.

Key Takeaways

The Trump-backed tax bill will let eligible workers exclude certain overtime and tip income from federal taxes.
To qualify, income and job-type restrictions apply, and proper reporting is required.
Senate Republicans may revise or reduce these proposed breaks to fund permanent business tax cuts.

Potential New Tax Breaks for Workers: Overtime Pay and Tips

As part of the “One Big Beautiful Bill,” two new tax breaks could significantly benefit hourly workers and employees who rely on tips. These changes aim to reduce taxable income for millions of Americans by excluding certain types of earnings, specifically tips and overtime pay, from federal income tax.

However, the Senate proposed a more limited version of these tax breaks. On June 16, 2025, the Senate Finance Committee released its own proposal that scaled back the broader tax exclusions included in the House’s “One Big Beautiful Bill Act.” While the House version allowed deductions on income up to $160,000 per year, the Senate plan phased out benefits for higher earners. Specifically, the Senate plan allows a $25,000 deduction for tip income, but begins to phase it out for single filers with modified adjusted gross incomes (MAGI) above $150,000 and joint filers over $300,000.

For overtime pay, Senate Republicans propose a separate $12,500 deduction for single filers and $25,000 for couples filing jointly. This deduction would also phase out at the same MAGI thresholds. These limits were part of a broader Senate effort to trim some of the House-approved provisions in order to offset the cost of making business tax breaks permanent.

Overtime Pay Becomes Tax-Deductible

Under the plan, workers will be able to deduct qualified overtime earnings from their federal taxable income. This means that if they work more than the standard 40 hours per week, extra pay received for those hours won’t be taxed like regular income.

To qualify, overtime pay must:

Be earned under the Fair Labor Standards Act rules for hours worked beyond the standard workweek.
Not be considered “tip income” (i.e., it can’t also be money you received as tips).

However, not everyone will be eligible. The deduction does not apply to:

Highly compensated employees (generally those earning above a certain threshold as defined by the IRS).
Overtime earnings already treated as tips.

You’ll also need to provide your Social Security number – and if filing jointly, your spouse’s – when you file your taxes to claim the deduction.

This change will apply to tax years starting after December 31, 2024, and before January 1, 2029.

How This Differs From the Previous Law:

All overtime pay was treated as regular income and taxed at your ordinary income rate. There was no special tax treatment for working extra hours. This change could lower the tax bills of hourly employees who frequently work overtime.

Cash Tips Are Excluded From Taxable Income

Another major change affects employees who earn tips, such as servers, bartenders, hairstylists and other service industry workers in qualified jobs. Qualified tips can be deducted from your taxable income, meaning you won’t pay federal income tax on them.

To qualify, the tips must:

Be cash tips paid voluntarily by customers (not service charges or mandatory gratuities).
Be received in a job that traditionally involved tipping before December 31, 2024.
Be properly reported on tax forms, such as Form 4137. This is the form used to calculate Social Security and Medicare tax on tip income.

There are some limitations. The deduction doesn’t apply to tips earned in certain high-income industries or specific service settings that the IRS may define in regulations. Also, as with the overtime provision, you’ll need to include your Social Security number on your return to qualify.

This provision would apply to tax years beginning after December 31, 2024, and ending after December 31, 2028.

How This Differs From the Previous Law:

Previously, all tips, cash or otherwise, were considered taxable income and were to be reported to the IRS. Employees were expected to pay income tax on these earnings, regardless of whether they were reported by the employer or employee. This proposal exempts a significant portion of tip income from federal taxation, providing relief to many low- and moderate-income worker

Will the Trump Tax Plan change your tax bracket? Learn more here.

Determining Qualification: A Guide to the Proposed Tax Exemptions

A taxpayer looking up new Trump tax plan provisions that exclude taxes on tips and overtime.

While the proposed tax exemptions on overtime pay and tip income are designed to offer financial relief to a broad segment of the workforce, they come with defined limitations. It’s important for both employees and employers to understand who qualifies, and under what conditions.

Overtime Pay Exclusions

Scope of the deduction: The tax deduction applies specifically to the additional compensation received for overtime work, not the full overtime wage. For example, if an employee earns a base wage of $20 per hour and receives $30 per hour for overtime, the deductible portion would be the $10 per hour premium, not the entire $30.
Income threshold: Workers with an adjusted gross income exceeding $160,000 in 2025 would not be eligible for the deduction. This threshold is set to adjust annually for inflation.
Deduction limit: The amount that can be deducted for overtime is capped at 20% of the employee’s regular wages from the same employer. As a result, the tax benefit is constrained even for those who frequently work overtime.
Non-qualifying overtime: Overtime pay that is categorized as tip income or that does not meet the standards established under the Fair Labor Standards Act (FLSA) would not be eligible for the deduction.

Tip Income Exclusions

Income threshold: Employees with annual earnings exceeding $160,000 are excluded from the tip income tax exemption.
Occupational limitations: The exemption applies only to workers in occupations that traditionally received tips before December 31, 2024. The Treasury Secretary is tasked with releasing a list of eligible occupations, which may exclude newer or unconventional tipped roles.
Reporting requirements: To qualify, tips must be properly reported on tax forms, such as Form 4137. Failure to report tips accurately can disqualify workers from the exemption.
Impact on benefits: Critics warn that excluding tip income from taxable earnings could inadvertently affect workers’ eligibility for certain federal benefits. These may include the Earned Income Tax Credit (EITC), which are based on reported income levels.

Bottom Line

A financial advisor working with a client on creating a tax plan.

The proposed tax exemptions for overtime pay and tip income represent a notable shift in federal tax policy, potentially affecting millions of American workers. While these measures are designed to increase take-home pay for eligible employees, they come with specific qualifications and limitations. As the “One Big Beautiful Bill Act” continues through the legislative process, staying informed about its provisions can help taxpayers estimate future tax bills. A financial advisor can help explain how these potential changes may influence your tax obligations and overall financial planning.

Tax Planning Tips

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