Understanding No Tax On Tips And Overtime Under Trump's Big Beautiful Bill: A Relief or Is There A Catch?

Donald Trump has delivered on two of his campaign promises with no taxes on overtime and no taxes on tips in his 'One Big Beautiful Bill Act,' but there are strings attached.

Trump has claimed that his bill 'prevents the largest tax hike in history and unleashes economic growth.' The bill was signed into law on Friday, containing two provisions that allow individuals to deduct tip wages and overtime from their taxes.

Despite claiming there are 'NO tax on Tips' and 'NO tax on Overtime,' there are limits on which taxes can be deducted and by how much. Also, not all workers are eligible for deductions.

A time limit has been placed on how long the changes will last, with deductions phased out over time based on income.

Here's what you need to know about no taxes on tips and overtime in Trump's bill.

Which Taxes Are Deducted?

The tax exemptions only apply to federal income tax, meaning federal payroll tax will still apply to any earnings.

For no taxes on tips, deductions only apply to 'qualified tips,' which are defined in the bill as 'cash tips received by an individual in an occupation which customarily and regularly received tips on or before December 31, 2024, as provided by the Secretary.'

The list of occupation types that qualify is set to be released in October.

'Qualified tips' also include tips added to a credit card charge and payouts that are part of a tip-sharing agreement.

Tips must also be given 'voluntarily' with the amount determined by the payor, putting into question other forms of gratuities and mandatory service charges.

For no taxes on overtime, employees will be able to deduct the taxes on their overtime earnings beyond their standard hourly wage. For example, those on an overtime rate of 1.5 times the regular rate can only deduct the extra 50%.

Employees who are eligible for overtime compensation under section 7 of the Fair Labor Standards Act are eligible for the deductions on overtime tax. This essentially applies to employees who are paid time-and-a-half for working more than 40 hours a week, although there are exceptions.

Overtime paid under contractual agreements or state law doesn't qualify for deduction unless it satisfies the FLSA's definition of overtime.

Qualified tips and overtime will need to be reported by employees on their Form W-2. Overtime is not currently recorded separately from employees' regular wages on Form W-2.

How Much Tax Can Be Deducted?

There is a limit to how much tax can be deducted from both overtime and tips.

For tips, the limit on tip wages deducted is $25,000 (£18,500) per year.

For joint filers, this number is the same for overtime, but for individuals, the cap is at $12,500 (£9,200) per year.

Individuals who earn over $150,000 (£111,217) per year don't qualify for tip wage or overtime wage deductions, and neither do joint filers who earn over $300,000 (£222,435) per year.

Deductions will be phased out by $100 (£74) for every $1000 (£741) earned above these limits.

There is also a time limit on the deductions, with both provisions set to expire in 2028.