Last year, as a part of the One Big Beautiful Bill Act, Congress made permanent the tax cuts passed in the 2017 Tax Cuts and Jobs Act. Included in the One Big Beautiful Bill were provisions that fulfilled campaign promises President Trump had made frequently during the 2024 election presidential campaign. Those two provisions that passed were No Tax on Overtime and No Tax on Tips. These two features were wildly popular among folks whose jobs afforded them ample opportunities for overtime pay, and service workers whose income was largely from tips, because it sounded like individuals would pay zero income tax on any amount of tip income and any overtime pay they received.
That’s certainly what I believed, and unless you looked into the details of these provisions, you probably believed it, too. But as we all know “the devil is in the details,” and in “the details” the devil reared his ugly head by saddling both of these provisions with significant limitations. I would have been completely unaware of these limitations had I not asked the server who waited on us at the restaurant we visited after church one recent Sunday.
He was a young man in his mid to late twenties who said he’d been in the service industry for several years and was working several jobs to keep himself going. He was very outgoing in his communications and was easy to talk to. So I just casually asked him, “How’s the no tax on tips working out?”
Well, his answer surprised me and wasn’t at all what I expected. His reaction was immediate and animated as if I had hit a nerve! He said in so many words the whole thing was a joke. He said there’s a limit to the amount of tip income that’s tax free, and the amount is way below what a full time server can make. He opined that Congress must have had people who work only part-time in mind because of the low limit. He called the whole thing “a scam!” I was upset when I heard that so I Googled “details of no tax on tips.” That led me also to Google “details of no tax on overtime.”
What I learned is that the total amount of tip income one is allowed tax free is only $25,000. That’s the maximum amount you can deduct from your gross income. Any amount above that is subject to regular tax rates. Daily tip income earned by a full time server depends, of course, upon the type of restaurant employing the individual. Casual, neighborhood, chain restaurants generate $50-$150 per day, more expensive restaurants $150-$300, while fine dining establishments can generate $600/day or more. A conservative daily tip income is $200, so for a 5-day week, a server could make roughly $1000. At $1000/week, the $25K limit is reached in June. That leaves 27 weeks where tip income is fully taxed.
Another restriction is the individual must be employed in one of the 70 specific jobs within 8 categories in the service industry. That includes bartenders, restaurant servers, porters, tour guides, coat checkers, handymen, food delivery workers, personal care aids, salon workers, and even street performers. The tips must be voluntary and not those automatically added to a bill.
Tax on overtime has a similar limit, but it’s less than the tip income. It’s $12,500 for individuals and $25,000 for marrieds filing jointly. I didn’t look up figures for the average overtime wages paid, but if your base pay is $20/hour, and overtime is “time-and-a-half,” or $30, it would take 417 hours to reach $12K. If you belong to the UAW and make $40/hr or $60/hr for OT, 12,500 is reached in 208 hours. That’s a lot of overtime, but it’s possible.
Our waiter obviously must make much more in tips than the $25,000 limit for him to react so demonstrably. To call it “a scam” is a bit much, but I do agree it isn’t the great pay increase one expected. Public perception is that any and all tips and all overtime pay are free of income tax. We now know that’s not true.
What was Congress thinking when they set those limits? I don’t know, but they weren’t thinking about service workers, the people who depend on tips for a living. They must be concerned that a lot of regular income will be reported as tips to keep from paying taxes on it. We also know the IRS is after every dollar it can get, and it doesn’t take kindly to people who hide income.
Despite the $25K limit, it is a deal for low income workers. It saves them nearly $5000 in taxes; money that would be lost otherwise. So “No Tax on Tips” isn’t exactly as I thought, but it still provides a few extra dollars which come in handy in an emergency.
Reference: www.Google.com/view-article/details-of-no-tax-on-tips
If it’s free, look for the strings. Promises are great but delivery is the key. Who gets the benefit?
Congress just couldn’t lose control of an income source so they had to limit the amount of tax free income.