A new law is about to change the tax system for millions of workers in our country. Have you heard about “One Big Beautiful Bill”? Just as Trump proposed during his election campaign, it aims to eliminate federal taxes on tips and overtime pay through 2028, well, that’s a good new, don’t you think?
Approved on July 3 and signed the following day, it’s very good news, at least, for those employees who will be able to deduct up to $25,000 annually in tips and up to $12,500 in overtime payments from their income.
Of course, this measure also includes changes for employers and extends tax benefits to new industries such as hair salons and beauty parlours. But is everything really as good as it sounds? Let’s see.
Tell me more about this law
In 2024 and throughout Trump’s campaign, there was a key promise: to ease the tax burden on income-based workers, who until now were fully taxed.
Let’s explain better, wait. Before this reform, all tips (whether in cash or electronic) were considered taxable income for federal purposes… It’s not that workers in these sectors don’t have a base salary, but it’s usually very low, and they depend almost entirely on tips or overtime pay. With the new law, workers who receive tips in a “habitual and regular” manner will be able to deduct up to $25,000 per year from their federal income tax return. That sounds good!
Who can access this deduction?
This measure is thought for workers whose livelihood depends heavily on those tips, primarily servers, bartenders, and hospitality workers. It will also apply to all tip income received before December 31 of last year.
And no, this deduction does not affect Social Security or Medicare taxes, but it can reduce income tax for millions of workers.
What should employers need to know?
Companies must include the total amount of tips received by each employee on the W-2 Form, along with the type of job done. For independent contractors, they will have to fill the Form 1099 with similar information.
On the other hand, the FICA tax credit is also expanded for employers, allowing them to deduct part of the taxes they pay on tips in sectors like hair salons, nail salons, and spas, as long as tipping is a common practice.
And, in addition to tips, this law includes a deduction of up to $12,500 for overtime payments to workers who exceed their regular work schedule. You can review this information in Section 70202 of the law.
Who does this affect?
Well, This law applies to all employees covered by the Fair Labor Standards Act (FLSA), specifically those who receive payments for working more than 40 hours per week, and it can be used along with the standard tax deduction.
How long will this law be in effect?
Those deductions will be available until 2028 (at least for the moment) but they could be extended if the administration decides to do so (let’s pray!)For now, let’s focus on the present, we still have three years of guaranteed full income.
How much can you save?
The White House has launched an official calculator so workers can estimate how much money they’ll save by no longer paying taxes on tips and overtime. This tool is available on their website and offers projections by state and type of income.
The elimination of taxes on tips and overtime pay is one of the most ambitious tax measures of the Trump administration. Whether it ends up affecting Social Security funds is another matter. With just a few months to go before the legislative elections, this moves strengthens his electoral base among service sector workers. But beyond politics, what matters here is that millions of families will get direct relief in their wallets.