While we do not often report on proposed legislation, two provisions in the bill the House Ways and Means voted out of Committee on May 14th (and which was voted out of the House Budget Committee on May 18th) are worthy of attention, as they reflect how two of President Trump’s campaign promises are beginning to take shape. Sections 110101 and 110102 of the Ways and Means Committee’s “One, Big, Beautiful Bill” would give certain workers an above-the-line deduction for “qualified tips” and “qualified overtime compensation” for taxable years beginning after December 31, 2024, and ending for taxable years beginning after December 31, 2028. Assuming the effectives dates relate to the service provider’s returns, and most service providers have a calendar year return and are on the cash method of accounting, the deduction would apply to tips and overtime paid in 2025 through 2028. This means the deductions are proposed to be retroactive and proposed to apply to amounts paid even before enactment of the bill.
As an above-the-line deduction, service providers will be able to directly reduce their gross income, whether they itemize or take the standard deduction, by the amount of the qualified tips or overtime. Making this deduction available to the worker creates reporting and withholding obligations for the service recipient, as discussed in more detail below.
In order to be deductible as qualified overtime compensation, the payment must be overtime paid as required under section 7 of the Fair Labor Standards Act that is in excess of the regular rate (as used in that section) at which such individual is employed. Qualified overtime compensation does not include any amount treated as a qualified tip.
In order to be deductible, qualified tips generally must be paid voluntarily to a person who works in an occupation which traditionally and customarily received tips on or before December 31, 2024. The Secretary of the Treasury is directed to provide a list of occupations that traditionally and customarily received tips in 2024 and before. As proposed, the deduction for qualified tips applies for both employees receiving a Form W-2, and independent contractors receiving a Form 1099-K or Form 1099-NEC, and includes amounts reported by the business on Form 4137. Those whose personal business provides services in accounting, health, law, actuarial science, athletics, brokerage services, consulting, financial services, or the performing arts would not be allowed to claim the tip deduction. In the case of tips received in the course of a trade or business, the deduction is proposed to be limited to gross receipts from the business less costs of goods sold and expenses allocable to such receipts. The Secretary of the Treasury is directed to prescribe regulations to prevent abuse of the deduction and reclassification of income as tips.Continue Reading No Tax on Tips and Overtime Campaign Promises Take Shape in “One, Big, Beautiful Bill”
