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How Tax On Overtime and Tips Really Works

Picture of The Kaizen Team The Kaizen Team · October 30, 2025

payroll + hr compliance
How Tax On Overtime and Tips Really Works
How Tax On Overtime and Tips Really Works
1:04
 

What does the IRS really allow when it comes to tax savings on overtime pay and tips?

In this episode of Kaizen Time, Brian Bride, Director of Payroll Operations at YPD, explains how the new tax deductions for overtime and tips work under the One Big Beautiful Bill Act (2025–2028).

You’ll learn:

  • How the new Schedule 1A form affects 2025 tax returns

  • Which occupations qualify for the $25,000 tip income deduction

  • Why only the overtime premium (not base pay) is deductible

  • How the 40-hour rule limits eligibility in states like California

  • Why these deductions reduce taxable income, not the tax you owe

Reality check:
These deductions offer modest relief, not major refunds. Workers earning $75k–$100k with consistent overtime or substantial tips will benefit most. For everyone else, it may mean a few hundred dollars back.

If you earn significant tips or overtime, understanding these new rules now can help you stay compliant and make the most of your return.

 

FAQs

For more tools, articles, and videos, visit the Kaizen + YPD Resources page.

YPD HCM is part of the Kaizen CPAs family. YPD HCM specializes in payroll and HR compliance for small businesses, providing the hands-on support to get your people paid and stay compliant without having to become an expert yourself.

The information in this article is provided for general educational purposes and reflects conditions as of the publication date. It does not constitute legal, tax, or compliance advice. For guidance specific to your business, consult a qualified professional.

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