Taxes on tips and overtime: What you need to know

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The “One Big Beautiful Bill” Act included some changes to the way tips and overtime are taxed, and there are a lot of questions about it. CPA and TurboTax expert Lisa Greene-Lewis offers some clarity on these new deductions and reporting them on your taxes. Watch the video above or read the transcript below.

Taxes on tips and overtime: What you need to know

Video transcript:

[MUSIC PLAYING]

TRACY BYRNES: So the One big Beautiful Bill Act has brought a lot of attention to overtime and tax on tips, and we need to decipher all of it. Lisa Greene-Lewis, CPA and TurboTax expert, is here with us to help us do all that because it’s confusing. Lisa, I think a lot of people think that now, all of a sudden, overtime and tips are free, and that’s just not the case, right?

So let’s just start from the beginning. Let’s start with tax on tips. What do people need to know?

LISA GREENE-LEWIS: Well, yeah, you’re right Tracy. The first thing you need to know, it’s really a deduction. So it’s not like your not being taxed at all. A deduction is—your tax savings is based on your tax rate. So with the deduction for tips, you’re able to deduct up to $25,000 in tips that you make. So if you’re in a profession that earns qualified tips like a waitress or a rideshare driver, you would be able to deduct those tips up to $25,000.

Now, it is also based on income. So if you make over $150,000 and you’re single or over $300,000 and married filing jointly, then, that deduction is phased out.

TRACY BYRNES: And tips need to be defined too, right? Because pooled tips are different from regular straight-up tips. Right? And then there’s tips that are reported on your W-2 versus clearly the under-the-table tips. Right? So all that needs to be worked through as well.

LISA GREENE-LEWIS: Right. Yes. Since this is the first year that this is implemented, your employer or payer, they’re not required to identify the tips in separate areas. But that’s one thing we have, TurboTax is really focused on is that area in the program. It walks you through all the different scenarios and all the different ways that tips could be reported on, whether it’s on your W-2 in, you know, different boxes, it walks you through how to figure that out, and what to input or what to give to your TurboTax expert, if you have an expert do your taxes.

TRACY BYRNES: Right. So it’s really important that right off the bat, report all your tips and then figure out what’s deductible and what’s not. But you really, I mean, in theory, it is all taxable income to start, right?

LISA GREENE-LEWIS: Yes.

TRACY BYRNES: And then we have to work through it. So who benefits the most from this new tax deduction tax on tips?

LISA GREENE-LEWIS: Anyone that’s considered a qualified professional. I know the IRS, they did put out guidance and a list of qualified professions that earn tips. So definitely, rideshare drivers were on there. People like waitresses, anyone like that would be eligible.

TRACY BYRNES: Right. Hairdressers, manicurists, things like that. They were all on the list too, I remember. OK. So now, the other big thing now is overtime. And I know people— like so many people, so many hard workers, in our country, firefighters, police officers, make overtime. What do these people now need to know? Because quite frankly, I think they deserve a break.

What do they need to know about the new, overtime tax or deduction on overtime?

LISA GREENE-LEWIS: The same as the tips. It is a deduction. It’s not like you’re not claiming that income at all, but the deduction for overtime, you’re able to deduct up to $12,500. And that’s if you’re single. It’s a little different if you’re married filing jointly you could deduct up to $25,000 in overtime. And then that is also based on income.

So if you earn over $150,000 and you’re single, that deduction is phased out. If you’re married, filing jointly and earn over $300,000 it’s phased out as well.

TRACY BYRNES: Lisa, is overtime reported separately on your W-2?

LISA GREENE-LEWIS: So this year, since this is the first year, they didn’t update W-2 forms to allow for tips or overtime. So it is going to be integrated into your—it could be integrated into your overall income or it can show up in various boxes this year.

TRACY BYRNES: All right. So Lisa, this stuff is really confusing. And throw in the “One Big Beautiful Bill” Act. There’s a lot going on. What do, what should people do if they’re just overwhelmed?

LISA GREENE-LEWIS: Yeah. If people don’t want to do it themselves they can hand their taxes over to our TurboTax full-service experts, and they can fully do their taxes for them, and they can connect with a TurboTax full-service expert, either virtually, or they can come into our new stores that opened up. And you can also get the same expert the next year, once you’ve used our full service.

TRACY BYRNES: Yeah, and full disclosure, I have to, I have to admit, I have connected with your virtual team and they’ve been really, really helpful. So Lisa Greene-Lewis, thank you for sharing all that. This stuff is complicated. We have to take our time. We appreciate your insight.

LISA GREENE-LEWIS: Thank you for having me. [MUSIC PLAYING]

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