The Realities of No Tax on Tips & Overtime in the "One Big Beautiful Bill"

The Omnibus Reconciliation Legislation was touted as a major win for workers by eliminating taxes on tips and overtime. In reality, these benefits are temporary, largely favor higher earners, and offer little lasting relief, particularly for LGBTQ+ service-industry workers disproportionately affected by the law’s limited scope and regressive structure.

By Mike Broemmel

USE ARROWS TO MOVE THROUGH IMAGES

A tremendous amount of attention in the traditional media, among new media pundits, across social media platforms, and even in face-to-face discussions at kitchen and restaurant tables the past six months has been about the so-called One Big Beautiful Bill. As a consequence, while some provisions of the legislation are known to the public at large, many myths and misconceptions persist. Perhaps more significantly, despite broad discussion of the legislation, many elements of the so-called Big Beautiful Bill remain clouded in darkness.

Understanding Mechanics of Reconciliation Legislation in the United States Senate

Technically, the Big Beautiful Bill is what is known as budget reconciliation legislation. The budget reconciliation process permits bills to pass through the U.S. Senate with a majority vote as opposed to 60 votes required to end debate and bring a proposed law to floor for full vote in the chamber. Absent the reconciliation process, there would have been no way for Trump allies in the Senate to amass the votes necessary to pass the current Administration’s core second-term agenda through a single piece of legislation. Hereinafter in this article, the bill will be referenced as the Omnibus Reconciliation Legislation.

No Tax on Tips Provision of the Omnibus Reconciliation Legislation

A considerable amount of attention is paid to a pair of provisions in the Omnibus Reconciliation Legislation that is promoted as eliminating tax on tips and overtime wages. The reality is that the no tax on tips and overtime wages elements of the legislation are not all they are proclaimed to be by the Administration and Members of Congress who backed the bill.

Before diving into the realities associated with the impact of the Omnibus Reconciliation Legislation on tips and overtime taxes, a focused look on its impact on members of the LGBTQ+ community is essential. The Human Rights Campaign reports that approximately 40 percent of LGBTQ+ community members in the labor force work in service-industry jobs. This includes positions of employment that involve tipping. As an aside, this compares with 22 percent of the non-LGBTQ+ population. Thus, the LGBTQ+ community is more significantly impacted by what is contained in the Omnibus Reconciliation Legislation than the broader cohort of American workers.

The most significant misconception about no tax on tips and on overtime wages is that these provisions will provide workers’ relief well into the future. The fact is that the tips and overtime tax elimination will sunset in a few years. In other words, taxpayers who earn tips and overtime will only be able to avoid certain taxes on these wages in fiscal years 2025, 2026, 2027, and 2028, according to the Tax Foundation. After that, these limited tax benefits will sunset and no longer be available to U.S. taxpayers.

1/1

Image: Tip Jar -Adobe Stock

An argument has been made by organizations like the Center for American Progress that this component of the Omnibus Reconciliation Legislation is a regressive tax. According to the Center for American Progress, a theory shared by other tax analysts and policy groups, is that lower income workers in many of the industries in which tips are a component of earnings will not be able to gain much benefit from no tax on tips. The reality is that a notable percentage of these workers already have little federal tax liability. Consequently, they may end up with next to nothing to offset the federal income tax deduction associated with tips during a particular tax year. Only higher earners will be in a position to take advantage of the no tax on tips provision of the Omnibus Reconciliation Legislation.

For the 2025 tax year, the standard deduction is $15,000 for single filers and those married filing separately, and $30,000 for married couples filing jointly. The no tax on tips provision allows eligible workers in traditionally tipped occupations to deduct up to $25,000 of reported cash tip income from federal income tax. This deduction applies whether or not the taxpayer itemizes but phases out for individuals with modified adjusted gross income over $150,000 ($300,000 for joint filers) and expires after 2028.

However, for many workers earning modest tip income, the new no tax on tips deduction may not offer much additional benefit—since the standard deduction already covers a substantial portion of their income. In many cases, they’ll reduce their taxable income just as effectively by claiming the standard deduction alone.

Example: Here’s how it would look If you make $50,000 total, with $20,000 in tips and $30,000 in wages as a single filer.

Exclude $20,000 (tips) → AGI = $30,000,
Apply $15,000 standard deduction,
Taxable income = $15,000.

Admittedly, it's better than nothing but remember, the law sunsets in 2028, and Social Security and Medicare are still taxed on the full $50,000.

Overtime Wages Provision of the Omnibus Reconciliation Legislation

A swath of workers may be in a position to enjoy the benefits of the no tax on overtime provisions during the four-tax year period the law will be in effect. The argument about this also being a regressive tax comes into play, Center for American Progress. Among workers who have the ability to earn overtime, a considerable percentage of these U.S. laborers will not be in a position to take advantage of this particular deduction because they do not have a significant federal tax liability in the first instance.

The net effect of the so-called no tax on overtime provisions in this law presents the same problem for workers who might earn overtime. The reality is that unless a considerable amount of overtime has been accumulated, a taxpayer would obtain a greater financial savings by using the standard deduction.

Here’s the reality: Only a portion is exempt from federal income tax, and only if you meet specific criteria.

What’s Actually in the Law? Under the Provision of the Omnibus Reconciliation Legislation, you may receive an above-the-line deduction for qualified overtime pay, but not a full tax-free pass.

You can deduct up to $12,500 (for single filers) or $25,000 (for married couples filing jointly) of qualifying overtime pay from your federal taxable income for each year from 2025 to 2028.
The deduction phases out if your modified adjusted gross income (MAGI) exceeds $150,000 (single) or $300,000 (joint.) Above these thresholds, the deduction shrinks gradually.
Only the “half-time” portion of overtime pay (the extra 50% of your regular rate for work beyond 40 hours/week) qualifies, not the entire overtime amount.
This applies only to non-exempt employees (those eligible for FLSA overtime,) not independent contractors, gig workers, or exempt salaried employees.
You still must file taxes normally and report your income. The deduction comes when you file, not at point of income or payroll withholding.

Taxes you still pay: Even though qualified overtime pay is deductible from federal income tax, you still need to pay, Social Security and Medicare taxes, and State and local income taxes, depending on whether your state follows federal tax changes.

1/1

Image: Creative Commons/Public Domain Pictures

Provisions of Legislation Allegedly Granting President Power to Suspend Federal Elections

One of the most pervasive myths associated with the Omnibus Reconciliation Legislation is that the law grants the President the power to suspend or delay presidential elections. Despite the recurring nature of this contention, there in fact are no provisions within the legislation that provide Trump or any U.S. President this type of authority.

As an aside, in another day and age, such a piece of legislation ultimately would be deemed unconstitutional. Considering certain decisions of the U.S. Supreme Court in the past two years, making an unequivocal statement regarding the constitutionality of a grant of such authority to the president (had it been given) arguably is not possible. The reality is that the impact of Trumpism on the federal judiciary, particularly the Supreme Court, has been profound and is likely to continue over the course of the coming generation.

In the final analysis, the legislation christened by Trump, the One Big Beautiful Bill is designed to further his focused agenda, which in and of itself is designed to limited goals at the expense of various segments of society – including the LGBTQ+ community. The one aspect of legislation that might have benefited LGBTQ+ persons – that pertaining to taxes on tips and overtime – is highly limited both in its application and in its expected lifespan.

Note: When it comes to understanding new tax provisions like the No Tax on Tips and No Tax on Overtime measures in the One Big Beautiful Bill, seeking help from a personal tax accountant can be invaluable. These provisions may sound straightforward, but the fine print often includes exceptions, income thresholds, or reporting requirements that aren’t immediately clear. A qualified tax accountant can explain how the laws apply to your specific situation, including whether you’re eligible for certain exemptions and how to properly document income for compliance. They can also help prevent costly mistakes, such as underreporting or misunderstanding how these provisions interact with the standard deduction or other credits. Ultimately, working with a tax professional provides peace of mind and ensures you take full advantage of the intended benefits, while staying squarely within legal and regulatory boundaries.

----
M

About the author

Writing and journalism has been at the heart of Mike’s life after graduating from college with a degree in political science and journalism and beginning his career in the White House Office of Media Relations and Planning (and then in the Office of the First Lady). A primary focus of his work has been in the realm of political analysis and commentary. Mike is also a playwright with several productions addressing issues of equality, diversity, and inclusion that have been produced internationally.

Since 2004, METROMODE has been a beacon for the LGBTQIA+ community and our allies. We’re a publication built on quality, not only in our advertising clients but in the look, feel, and editorial pieces of each magazine. METROMODE speaks to the entire community with thoughtful analysis of local, national, and global events affecting our community; developments in business, finance, the economy, and real estate; interviews with emerging and seasoned artists, musicians, and writers; appealing new opportunities to enjoy Colorado’s rich culture and social atmosphere; quality aesthetic experiences from film, to food, to music, to art, to night life; and challenging social and political thought.