[US] Trump’s ‘Big, Beautiful Bill’ Includes No Tax on Tips, Overtime Pay

Analysis by Michael Baer 

Deductions from income for tips and overtime pay are included in the blueprint of tax provisions the House Ways and Means Committee released for what President Trump calls “the big, beautiful bill” that goes beyond simply extending tax cuts set to expire the end of the year.  

The “no taxes on tips” proposal became a rallying cry for the Trump campaign in 2024, and later, the idea to not apply income tax to extra pay due to working overtime also was promised to voters.  

The committee’s section-by-section descriptions of these two payroll-related matters are short on detail, however. Both provisions, as described so far, would allow individuals to deduct from overall taxable earnings (an “above-the-line deduction”) the amounts, if qualified, on annual individual returns.  

There is no mention of an exclusion for Federal Insurance Contributions Act taxes (FICA) or social tax purposes for individuals. (There is a separate proposal to expand a tip credit for the employer portion of FICA taxes to cover those receiving tips in beauty service establishments.) 

The proposed legislation does not mention employers adjusting taxable income when the tips or overtime pay are received. Both deductions would only be effective from tax years 2025 to 2028. 

If the provisions are passed into law as developed by the committee, potential scenarios for payroll operations include: 

• With a lack of more detail, continue to treat the tax-free amounts as taxable for income tax withholding purposes, but include special reporting of the specific totals on annual information return filings with workers.  With 2025 included as a covered taxable year, employers would need to have the special reporting programs developed prior to providing tax returns to individuals in early 2026. Individuals would then refer to that information to claim the deduction on their return.  

• If there is more guidance from additions to the legislation and/or regulatory guidance from the Internal Revenue Service, there may be instructions to not withhold income taxes on qualified amounts, in addition to special reporting, however, of specific totals on annual information return filings with workers.   

• The tip and overtime pay amounts would continue to be withheld for FICA tax purposes. 

Deduction Details So Far   

The tip deduction would be allowed for both employees and independent contractors. Those whose personal business provides services in accounting, health, law, actuarial science, athletics, brokerage services, consulting, financial services, or the performing arts would not be allowed to claim the tip deduction. 

To help narrow the scope of the tip deduction, the proposed provision limits qualified tips to those in occupations that traditionally and customarily receive tips on or before December 31, 2024. 

According to the proposed legislation, qualified overtime compensation would align with overtime required for covered employees under the federal Fair Labor Standards Act. 

For both the tip and overtime deductions, only those who do not exceed the annual amount designated as highly-compensated (currently $160,000) and those who have work-eligible Social Security numbers would qualify. 

Next Steps 

In addition to the deduction for tips and overtime pay, the proposal encompasses many aspects of tax law and employment taxes in the U.S. See the full text of the Ways and Means Committee proposal here: https://waysandmeans.house.gov/wp-content/uploads/2025/05/The-One-Big-Beautiful-Bill-Section-by-Section.pdf 

This legislation is crafted only by the majority House Republicans. There has been little input allowed by the minority Democratic Party members of Congress. Special procedures approved earlier in the year by Congress allow this process to happen this way and in a relatively short time frame.  

Senate Republicans will need to approve the document, and there likely will be changes in the upcoming weeks before the legislation can be finalized.  

Analysis by Michael Baer 

Deductions from income for tips and overtime pay are included in the blueprint of tax provisions the House Ways and Means Committee released for what President Trump calls “the big, beautiful bill” that goes beyond simply extending tax cuts set to expire the end of the year.  

The “no taxes on tips” proposal became a rallying cry for the Trump campaign in 2024, and later, the idea to not apply income tax to extra pay due to working overtime also was promised to voters.  

The committee’s section-by-section descriptions of these two payroll-related matters are short on detail, however. Both provisions, as described so far, would allow individuals to deduct from overall taxable earnings (an “above-the-line deduction”) the amounts, if qualified, on annual individual returns.  

There is no mention of an exclusion for Federal Insurance Contributions Act taxes (FICA) or social tax purposes for individuals. (There is a separate proposal to expand a tip credit for the employer portion of FICA taxes to cover those receiving tips in beauty service establishments.) 

The proposed legislation does not mention employers adjusting taxable income when the tips or overtime pay are received. Both deductions would only be effective from tax years 2025 to 2028. 

If the provisions are passed into law as developed by the committee, potential scenarios for payroll operations include: 

• With a lack of more detail, continue to treat the tax-free amounts as taxable for income tax withholding purposes, but include special reporting of the specific totals on annual information return filings with workers.  With 2025 included as a covered taxable year, employers would need to have the special reporting programs developed prior to providing tax returns to individuals in early 2026. Individuals would then refer to that information to claim the deduction on their return.  

• If there is more guidance from additions to the legislation and/or regulatory guidance from the Internal Revenue Service, there may be instructions to not withhold income taxes on qualified amounts, in addition to special reporting, however, of specific totals on annual information return filings with workers.   

• The tip and overtime pay amounts would continue to be withheld for FICA tax purposes. 

Deduction Details So Far   

The tip deduction would be allowed for both employees and independent contractors. Those whose personal business provides services in accounting, health, law, actuarial science, athletics, brokerage services, consulting, financial services, or the performing arts would not be allowed to claim the tip deduction. 

To help narrow the scope of the tip deduction, the proposed provision limits qualified tips to those in occupations that traditionally and customarily receive tips on or before December 31, 2024. 

According to the proposed legislation, qualified overtime compensation would align with overtime required for covered employees under the federal Fair Labor Standards Act. 

For both the tip and overtime deductions, only those who do not exceed the annual amount designated as highly-compensated (currently $160,000) and those who have work-eligible Social Security numbers would qualify. 

Next Steps 

In addition to the deduction for tips and overtime pay, the proposal encompasses many aspects of tax law and employment taxes in the U.S. See the full text of the Ways and Means Committee proposal here: https://waysandmeans.house.gov/wp-content/uploads/2025/05/The-One-Big-Beautiful-Bill-Section-by-Section.pdf 

This legislation is crafted only by the majority House Republicans. There has been little input allowed by the minority Democratic Party members of Congress. Special procedures approved earlier in the year by Congress allow this process to happen this way and in a relatively short time frame.  

Senate Republicans will need to approve the document, and there likely will be changes in the upcoming weeks before the legislation can be finalized.