Dec 5, 2025
If you’ve gotten excited about President Trump’s “no tax on tips” provision, a recent message from the Internal Revenue Service could leave you a bit disappointed.
Ahead of the 2026 tax season, the IRS has released guidance for workers who can claim deductions for overtime pay and tips. While workers will be able to deduct these things from their taxable income, it’s important to understand that these provisions from Trump’s “Big Beautiful Bill” are temporary, capped at a certain limit, and only available to specific occupations in certain industries.
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In other words, the no tax on tips and no tax on overtime provisions are considered targeted deductions, as opposed to a full “tips and overtime are tax-free” program. Since this could create some confusion, here’s what you need to know.
How no tax on tips and overtime works
According to IRS estimates, approximately six million American workers report tipped wages, while roughly 6% of the country’s work force reported overtime pay in 2024, CNBC reports (1).
In the new year, this large cohort of taxpayers will have to navigate their way through Trump’s new tax rules on tips and overtime, a process that some experts believe will create plenty of confusion.
“Taxpayer confusion will be off the charts at tax time on these provisions,” Terry Lemons, former IRS communications and liaison chief, said in a post shared on LinkedIn, according to CNBC.
The no tax on tips rule lets eligible workers deduct up to $25,000 in “qualified tips” on their taxes from 2025 through 2028, which means qualified workers will only be able to deduct their tips for the next few years. This tax break also phases out if the recipient’s modified adjusted gross income tops $150,000, or $300,000 for married couples filing their taxes jointly. Cash tips also need to be reported in order to qualify.
For overtime pay, Trump’s tax break will allow single filers to deduct up to $12,500, while offering a $25,000 deduction for joint filers. To qualify, a worker’s overtime must meet federal labor standards, and the worker must be a non-exempt W-2 employee (2). Those who qualify for overtime compensation can deduct the overtime premium (the “half” portion of “time-and-a-half”) from their taxable income (3).
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According to the legislation, workers can only deduct tips and overtime if their earnings are reported through information returns like Forms W-2 or 1099. And while the IRS is encouraging employers across the country to provide this reporting, employers are not required to do so for the 2025 tax year. In fact, the IRS says employers will not be penalized for failing to provide correct payee statements to employees, or failing to file correct information returns (4).
“We’re going to have this hodgepodge, weird year of rules that’s going to make reporting very difficult for employees,” said Thomas Gorczynski, an enrolled agent based in Arizona.
With all of this in mind, some workers could mistakenly assume that all of their tips can be deducted from their income, while others may not realize they qualify for a deduction at all. It’s on the workers themselves to understand if they qualify, figure out the deduction and claim it correctly.
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Who qualifies for no tax on tips
The United States Department of the Treasury’s new “Tipped Occupation Code” system provides descriptions — as well as a three-digit code — for the occupations that are eligible for no tax on tips (5). The list is divided into eight buckets that heavily favor the service industry:
- 100s: Beverage & food service
- 200s: Entertainment & events
- 300s: Hospitality & guest services
- 400s: Home services
- 500s: Personal services
- 600s: Personal appearance & wellness
- 700s: Recreation & instruction
- 800s: Transportation & delivery
If you’re not sure whether your job falls under one of the listed occupations, be sure to check, as you’ll likely want to take advantage of this tax deduction on tips, if you qualify.
How to avoid confusion with your taxes
The IRS has acknowledged that most American employers lack the necessary systems to report all of the new tips and overtime details on W-2s and other forms for the 2025 tax year. With this in mind, here’s what workers looking to bank on Trump’s provisions can do to clear up any confusion with their taxes.
1. Make sure your occupation falls under the qualifications for no tax on tips. For those seeking deductions for their overtime work, make sure that your overtime meets federal labor standards, and confirm that you are in fact a non-exempt W-2 employee.
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2. If you qualify, keep track of all of your tips and overtime records, including W-2s and 1099s.
3. Calculate your deduction amount for the year, and don’t forget about the caps on both tips and overtime deductions that were mentioned above.
Unfortunately, Trump’s no tax on tips and no tax on overtime provisions may not live up to what Americans were expecting. These are temporary, targeted deductions that were designed for specific workers, and only if they meet certain criteria.
But for those who qualify, the savings can be significant, and failing to understand the rules could lead to missed deductions or tax-season headaches. When in doubt, double-check your occupation, run the numbers, and don’t wait until the 2026 tax season to figure this all out. If you need help with putting all of this together, you can always consult with a tax professional.
Article sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
CNBC (1); H&R Block (2); IRS (3, 5); Forbes (4)
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Jessica is a freelance writer with a professional background in economic development and small business consulting. She has a Bachelor of Arts in Communications and Sociology and is completing her Publishing Certificate.
