What to Know about “No Tax on Overtime” and “No Tax on Tips”

The One Big Beautiful Bill Act (OBBBA) delivered wins for President Trump on two prominent campaign promises: no taxes on overtime and no taxes on tips. NAHB members may wonder if they are affected by these two tax changes as either a business owner or an employee.

No Tax on Overtime

Retroactive to the beginning of 2025, no tax on overtime establishes a new above-the-line tax deduction for qualified employees. This deduction is temporary, expiring after 2028.

Eligible employees may deduct up to $12,500 in qualified overtime pay as a single filer or $25,000 as a joint filer. The deduction phases out for taxpayers with income exceeding $150,000 ($300,000 in the case of a joint return). Taxpayers do not have to itemize to claim the deduction.

The deduction only applies to wages paid in excess of the employee’s normal wage rate. In other words, an employee who earns $20 per hour normally, but $30 an hour with overtime, is able to deduct $10 per hour in overtime pay.

Not all overtime is eligible for the deduction. The additional wages must be paid as required by Section 7 of the Fair Labor Standards Act of 1938 (FLSA), which essentially applies to employees working more than 40 hours per week. Overtime paid under contractual agreements or state law does not qualify unless it also satisfies the FLSA's definition of overtime. In addition, overtime wages remain subject to payroll taxes such as Social Security and Medicare.

Employers are required to report qualified overtime wages — qualifying wages in excess of the employee’s normal pay rate — on an employee’s Form W-2. Currently, overtime pay is not recorded separately from regular wages on Form W-2. For 2025, OBBBA includes a transition rule allowing employers to “approximate a separate accounting of amounts designated as qualified overtime compensation by any reasonable method specified by the Secretary [of Treasury].” The IRS will likely issue additional guidance on this in the coming months.

Employers should work with their payroll provider, accountant or other tax professional to ensure they are tracking eligible overtime wages.

No Tax on Tips

Tipping is uncommon in residential construction, but some workers, such as home service or repair professionals, may receive tips.

Retroactive to the start of 2025, no tax on tips provides an above-the-line deduction up to $25,000 for tipped workers. The deduction phases out for taxpayers with income exceeding $150,000 ($300,000 in the case of a joint return). Taxpayers do not have to itemize to claim the deduction. This deduction is temporary, expiring after 2028.

To be eligible for the deduction, the taxpayer must work in an occupation that customarily and regularly receives tips. Within 90 days of being signed into law (by early October), Treasury must publish a list of occupations that customarily and regularly receive tips.

Tips must be given voluntarily. Mandatory service charges are ineligible.

Certain occupations are ineligible under OBBBA from claiming the deduction. Ineligible employees are those working in a trade or business that meet the definition of a Specified Service Trade or Business (SSTB) under Section 199A of the Internal Revenue Code. An SSTB is a trade or business involved in accounting; health care; law; actuarial science; athletics; brokerage services; consulting; financial services; the performing arts; investing and investment management; and dealing in securities, partnership interests, or commodities. An SSTB can also be a business whose principal asset is the reputation or skill of one or more of its owners or employees.

Tips will have to be reported on an employee’s Form W-2. A transition rule like that provided for “no tax on overtime” is also included for reporting tips in 2025. In addition, tipped wages remain subject to payroll taxes such as Social Security and Medicare.

NAHB is providing this information for general information only. This information does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind nor should it be construed as such. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers. Before making any decision or taking any action on this information, you should consult a qualified professional adviser to whom you have provided all of the facts applicable to your particular situation or question.