Just Passed: New Tax Breaks for Tips and Overtime Could Boost Your Refund

If you earn tips or work overtime, there is some good news in a new law called the Big Beautiful Bill. Starting next year, you could pay less in federal taxes and keep more of what you earn.

Here is what you need to know.

What’s the New Tax Break?

The new law allows certain workers to deduct some of their tips and overtime pay from their taxable income. This means you might owe less in taxes or even get a bigger refund when you file.

Here is how it works:

• You can deduct up to 25,000 dollars in tips from your taxable income

• You can also deduct up to 12,500 dollars in overtime pay

• These deductions apply for tax years 2025 through 2028

• If you are married and file jointly, those amounts may be doubled

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For example, if you earned 35,000 dollars total but 10,000 was from tips and 5,000 was from overtime, you might only be taxed as if you earned 20,000 dollars. That could lead to a real difference in your tax refund.

Who Qualifies?

This tax break is designed for working people, especially in industries like restaurants, hospitality, healthcare, retail, and warehouses.

You may qualify if:

• You have a valid Social Security number

• You report your tips and overtime income as usual

• Your income is under 150,000 dollars if you file as an individual, or under 300,000 dollars if you are married and file jointly

If you earn more than these amounts, the deduction starts to phase out.

What Do You Need to Do?

This change will not affect your paycheck right away, but you will notice it when you file your taxes. Here is how to prepare:

1. Keep track of your tips and overtime

   Your employer should report these amounts on your W-2, but it helps to keep your own records too.

2. Report your tips honestly

   Because the deduction helps you, it makes sense to report all the tips you receive.

3. Talk to your tax preparer

   Let them know how much you made in tips and overtime. They will help you take the new deductions when you file.

4. Consider updating your W-4 form

   If you usually get a large refund or owe money at tax time, you might want to change how much tax is withheld from each paycheck. Your employer or payroll provider can help.

   
   

Example: Meet Jasmine

Jasmine works at a restaurant and earns 18 dollars per hour. She also makes about 8,000 dollars in tips and 3,000 dollars in overtime each year.

Under the new law:

• Jasmine can deduct the full 11,000 dollars from her taxable income

• She will only be taxed on the remaining income

• This could save her hundreds or even over 1,000 dollars when she files her taxes

What This Does Not Do

There are a few things this change does not mean:

• It does not make your tips or overtime tax-free right away

• It does not automatically change how much tax is taken out of your paycheck

• It does not change how your employer calculates your regular pay

You will see the benefit when you file your taxes.

Final Thoughts

If you work hard for your tips or often put in extra hours, this new tax break is for you. It is a chance to keep more of your earnings and pay less to the government.

At Missouri Valley Payroll, we are watching these changes closely and are ready to help. If you or your employer have questions about how this law will affect you, we are here to explain and support every step of the way.

Disclaimer: This article is for informational purposes only and is not intended as tax or legal advice. Individual tax situations may vary. Please consult a qualified tax professional for guidance specific to your circumstances.