No tax on tips and overtime pay is officially law, as part of President Donald Trump’s sprawling tax cut and spending package signed into law on Fourth of July.
Despite heated partisan divides over some parts of the bill — particularly its cuts to social safety-net programs — the no tax on tips measure has seen bipartisan support since Trump first proposed it on the 2024 campaign trail.
Here’s what to know about no tax on tips and overtime pay, including when Wisconsin workers may begin seeing the deductions:
How will no tax on tips, overtime work?
Under the new tax cut, workers can deduct up to $25,000 in tips and $12,500 in overtime pay from their taxable income on federal tax returns.
Individuals who earn more than $150,000 are not eligible for the tax cut.
When will no tax on tips go into effect?
No tax on tips and overtime is in effect for the 2025 tax year.
That means eligible workers won’t see an immediate boost in take-home pay, but they may see a lower tax bill or increased refund when they file for this year’s taxes in early 2026.
The deductions are set to expire in 2028 — the end of Trump’s second term — unless extended.
How many people would benefit from no taxes on tips?
A relatively small percentage of Americans would benefit from no taxes on tips, according to tax policy experts.
About 4 million people, or 2.5% of U.S. workers, were tipped in 2023, per a 2024 analysis by Yale University’s Budget Lab. More than a third of these tipped workers didn’t make enough money to pay federal income taxes anyway — meaning the lowest-earning workers won’t benefit much from the bill.
Of the households that will benefit from the bill, the average tax cut will be about $1,800 a year or $35 a week, according to an analysis by the Tax Policy Center. The center also theorized the tax cut may lead employers in some places to lower wages and expect workers to rely more on tips.
What else is in Trump’s ‘big, beautiful bill’?
Along with the no tax on tips measures, the bill extends Trump’s 2017 tax cuts and increases military and border security spending.
The bill pays for these and other tax cuts by slashing billions of dollars in funding for social safety-net programs, like Medicaid and the Supplemental Nutrition Assistance Program, sometimes referred to as food stamps. According to some nonpartisan estimates, the bill will increase the national debt by about $3.3 trillion.
Given the slashes to social safety-net programs, some experts have argued any modest savings from no tax on tips and overtime would be offset by the potential loss of health insurance or food assistance for low-earning workers. Under a previous version of the bill, Wisconsin officials estimated 63,000 childless adults would lose Medicaid coverage in the state.
All of Wisconsin’s House Republicans and U.S. Sen. Ron Johnson ultimately voted for the bill.
Will there still be a state tax on tips in Wisconsin?
The bill only applies to federal income taxes, so Wisconsin workers will still have to pay state taxes on tips.
Both Republicans and Democratic Gov. Tony Evers have supported exempting cash tips from state income taxes. Still, that policy was not included in the state budget signed into law in early July, but it does include tax relief targeted to middle-income earners and retirees.
Lawmakers introduced a separate bill to exempt cash tips from state income taxes, but it’s only received one public hearing and hasn’t gotten any votes. Unless it advances further, it’s not likely to become law this session.
What is Wisconsin’s tipped minimum wage?
The minimum wage for tipped workers in Wisconsin is $2.33. If tips, combined with that hourly rate, don’t equal Wisconsin’s minimum wage of $7.25, employers must cover the difference.
Democrats in Wisconsin have introduced proposals to increase both of those minimum amounts, but Republicans often argue employers already offer much more to attract workers.
What is considered a tip for tax purposes?
According to the Internal Revenue Service, any tips of $20 or more that an employee receives in a month from one job are considered wages that are subject to income tax.
Along with cash received directly from customers, the following are all considered taxable tips: electronic payments, noncash tips in the form of other items of value and tips received from other employees via tip pools or other informal sharing arrangements.
This article originally appeared on Milwaukee Journal Sentinel: No tax on tips, overtime pay is officially law. What does it mean for Wisconsin workers?
Reporting by Maia Pandey and Hope Karnopp, Milwaukee Journal Sentinel / Milwaukee Journal Sentinel
USA TODAY Network via Reuters Connect
