One Big Beautiful Bill: New Tipping & Overtime Income Exemption

The One Big Beautiful Bill (OBBB) includes a unique, temporary provision that could put more money directly into the pockets of workers in industries that rely heavily on tips and overtime pay.

If you work in restaurants, hospitality, healthcare, retail, or other fields where extra income often comes from tips or overtime, this change could mean a meaningful tax break—but only for a few years.

How the New Exemption Works

From 2026 through 2028, certain tips and overtime earnings will be exempt from federal income tax—up to a specific dollar limit.

Tipped income: Up to $25,000 per year can be exempt.
Overtime pay:
- Single filers: Up to $12,500
- Married filing jointly: Up to $25,000

Who Qualifies?

You must meet two main requirements:

Income Limits

Single filers: Modified AGI under $150,000.
Married filing jointly: Modified AGI under $300,000.

Income Source

The exempt amount applies only to tips or overtime pay from your employer.
Self-employed income, bonuses, or commissions do not qualify under this provision.

What Counts as “Tips” and “Overtime”?

Tips:

Cash tips received directly from customers.
Tips received through tip pooling or splitting.
Charged tips from credit or debit card transactions.

Overtime:

Pay for hours worked over the standard 40-hour workweek (or applicable daily overtime limits in your state).

Why This Matters

For workers in qualifying industries, this is essentially tax-free extra income—up to the limits.

Example:
A single restaurant server earning $18,000 in reported tips and $8,000 in overtime in 2026 could exclude the entire amount from taxable income (since both amounts are under the respective limits and AGI is below $150,000).

If they are in the 22% federal bracket, that could mean over $5,700 in tax savings in a single year.

Key Considerations & Planning Tips

Accurate Reporting Is Critical: Even though these earnings may be tax-exempt, they still need to be reported properly on your tax return.
Watch the Income Limits: If your AGI creeps over $150,000 (single) or $300,000 (joint), you lose the exemption.
Three-Year Window: This provision only applies from 2026 to 2028—there’s no guarantee it will be extended.
Employer Coordination: Employers must still withhold Social Security and Medicare taxes on tips and overtime—only federal income tax is affected.
Keep Documentation: Maintain records of tip income, overtime hours, and employer pay statements in case of IRS inquiry.

Who Benefits Most?

Restaurant & Hospitality Workers

Servers, bartenders, hotel staff, and delivery drivers who earn a significant portion of their income in tips.

Healthcare & Skilled Trade Workers

Nurses, EMTs, factory workers, and other professionals who regularly work overtime shifts.

Retail & Seasonal Workers

Holiday season or busy-period workers who log extra hours.

Final Takeaway

The OBBB’s tipping and overtime exemption is a targeted, temporary benefit aimed at rewarding workers who put in extra time or earn through customer service tips. For eligible taxpayers, it’s a rare opportunity to receive part of your income entirely free from federal income tax.

If you expect to earn tips or overtime during 2026–2028, planning ahead could help you maximize the benefit before it disappears.

Want to make sure you’re ready to claim this exemption when it starts?

📖 Read more about the OBBB: molentax.com/obbb-webinar-series/#blogs
🎓 Attend a free webinar: molentax.com/obbb-webinar-series/#register
📅 Schedule a 1-on-1 consultation: molentax.com/contact

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