It’s almost time to file tax returns. Watch out for these limits on the tips and overtime deductions.

By now, most people have heard about the “no tax on tips” and “no tax on overtime” provisions of “One Big Beautiful Bill” that became law during the summer. It sounds great. But unfortunately, the new legislation is not all that it seems. Why?

Yes, there is a “no tax on tips” benefit. But be careful because you may not be eligible.

A specific list shows all the jobs that qualify. As a rule of thumb, you’ll be eligible for the tipped income deduction if you work in a business where tips are common. Regardless, you should know that the deduction is limited to $25,000 per person and begins to phase out once you start earning more than $150,000 individually and $300,000 if you file a joint return.

You can only take advantage of the deduction when you file your individual tax returns after the year has ended. And if these deductions result in you getting a tax refund, you’ll have to wait until next year, when your 2025 return can be filed and processed by the IRS.

Remember too that this deduction is scheduled to expire in 2028, so you’ve only got a few years to take advantage. So does the deduction on overtime wages.

The overtime deduction is even more limited. It only applies to the “overtime” wages you receive, which means that if you receive time-and-a-half for overtime worked, you get to deduct only the amount related to the “half.”

For example, if your base wage is $20 an hour and you get paid $30 for one hour of overtime, only the $10 difference is eligible for the deduction. Also, the overtime deduction is limited to $12,500 for individuals and $25,000 for joint-filers, and it begins to phase out after you’ve earned more than $150,000 individually or $300,000 if you’re filing a joint return. And, depending on prevailing wage rules or overtime calculations that are part of union contracts, some of these wages may not be eligible at all.

Even though the new law promises “no taxes” on tipped and overtime income, that’s not entirely true either. Social Security and Medicare taxes will still be required by both employees and their employers. Most states — including Pennsylvania and New Jersey — are not excluding tipped or overtime income from their tax calculations.

“It’s kind of a misnomer,” said Andrew Gargana, a federal compliance analyst at HR firm Paychex. (Gargana is a client of my firm.)

“Yes, no tax on tips or overtime sounded great on the campaign trail, but the reality is that an employee is still paying some taxes on this income,” Gargana said.

If you’re an employer that has tipped workers or pays overtime, you are looking at potential reporting headaches.

Employees now must know the correct amount of tipped wages and overtime to include in their tax returns. Usually, this will come from their W-2 form, which is used to report wages and is required to be mailed by the employer to both the employee and the IRS by the end of January.

The IRS has released a draft form W-2 for 2026 that enables an employer to separately report these amounts. But what about 2025?

According to a blog post from Bala Cynwyd-based accounting firm Isdaner & Co., the IRS announced that the 2025 versions of Form W-2 — where overtime wages are not broken out from total compensation — will be unchanged.

Gargana says 2025 reporting will be like the “Wild West.”

“The IRS’s guidance just offers ‘transition relief’ to employers and employees for 2025,” he said. “As long as an employer makes reasonable attempt at reporting, the IRS is not going to penalize. They’re acknowledging that employers and employees were not tracking this information in the form they needed at the beginning of the year.”

But what is “reasonable”? And what if their mistakes cause a significant mistake on their employee’s tax return? It is unclear how much leeway employers will get. Accuracy still matters, and a big enough miscalculation could mean potential penalties and interest for employees that underreport taxes due and a potential legal problem for the employer.

In the end, the responsibility of filing a correct individual tax return still rests with the individual.

“Employers and payroll management companies should begin tracking qualified tip and overtime income immediately and implement procedures to retroactively track qualified tip and overtime income amounts that were paid going to Jan. 1, 2025,” accounting firm Isdaner said in an email to clients.

This is a looming hassle for employers. Whether they’re required to report externally or not, workers and their accountants will want to take advantage of this deduction, and if the amounts they need are not disclosed on their W-2, they’re going to be pressing their bosses for the correct information for their individual tax returns.

Both Paychex and Isdaner are warning their clients to get on top of this issue to avoid confusion when employees start filing their individual returns. Gargana said employers may even provide a separate statement along with employees’ W-2 forms.

“Communication is critical,” Gargana said. “Employers should expect questions and proactively share available data.”