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By Suzanne Blake
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Despite the Trump administration’s widely touted large tax refunds this year, some Americans will actually end up with a bigger tax bill after new tax rules go into effect.
“One of the biggest risks with the new overtime and tip deductions is that they rely heavily on providing accurate self-reporting. If employers aren’t required to certify qualifying overtime or tip income in a standardized way, the burden shifts to employees to determine what portion of their earnings generated through tips is actually eligible,” Alex Beene, a financial literacy instructor for the University of Tennessee at Martin, told Newsweek.
“That creates room for plenty of mistakes that could trigger notices from the IRS if numerous errors are included in the filing.”
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Why It Matters
Across the board, tax refunds are set to increase an average of $1,000 per household due to President Donald Trump’s Working Families Tax Cuts, the Treasury Department said this week.
However, depending on how rules like the no tax on tips affect your specific situation, you could end up with a heftier bill than expected.
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What To Know
The Trump administration has ushered in a wave of tax changes that will cause significant updates to what Americans owe and potentially how large their tax refund is.
More than 100 million households are set to receive a refund. For American families with two children, the average tax cut will be $1,700 because of the enhanced child tax credit.
The child tax credit for tax year 2025 increased to $2,200 and was adjusted for inflation, and the standard deduction doubled, impacting roughly 90 percent of American taxpayers, the Treasury said.
However, there is a group of Americans who may have a larger tax bill in future years if the IRS audits them based on the new changes and their information is found to be incorrect.
No Tax on Tips Explained
Starting with the 2025 tax year (which are returns filed in 2026), the “No Tax on Tips Act” added a new federal deduction for qualifying tip income.
This means you can deduct up to $25,000 of your tip income from your federal taxable income.
A deduction lowers the income the IRS taxes, so you pay less federal income tax, and the deduction is available whether you itemize or take the standard deduction.
However, it’s not as straightforward as some taxpayers may believe.
"The phrase 'no tax on tips' sounds straightforward, but the reality is far different, and that’s where taxpayers could run into surprises. The new provision reduces federal income tax liability through a deduction, but it does not eliminate Social Security and Medicare taxes on tip income," Alex Beene, a financial literacy instructor for the University of Tennessee at Martin, told Newsweek.
"For workers, this means they will still see FICA taxes withheld from their paychecks throughout the year, even if their income tax bill is lower when they file. For some, that could translate into smaller refunds than expected."
When Did No Tax on Tips Start
Although it was signed in July of last year, the tip deduction is written to apply retroactively to tips earned starting January 1, 2025.
That means you can claim it on your 2025 tax return this year. The deduction applies for tax years 2025 through 2028 unless Congress extends it.
Financial experts caution taxpayers from reporting cash tips without a record.
“You're supposed to use your W-2 Box 7, maybe Form 4070 if you reported them monthly, or if your employer was nice enough to actually report cash tips in Box 14. But here's the thing, a ton of people are gonna look at that number and think, ‘Yeah, but I made way more than that in unreported cash tips.’ And they're going to add it,” Michael Ryan, a finance expert and the founder of MichaelRyanMoney.com, told Newsweek.
“Don't do that. Seriously. If those tips aren't on your W-2 or on Form 4137, and you suddenly claim them, you're basically raising your hand and saying, ‘I didn't report these to my employer when I was supposed to.’ The IRS can go back and nail you with FICA taxes you owe plus penalties. It's not some clever loophole. It's admitting you skipped taxes before.”
No Tax on Overtime Start Date
The No Tax on Overtime provision was included in the One Big Beautiful Bill Act, which Congress passed and the President signed into law on July 4 of last year.
However, the law is also retroactive, so it applies to overtime earned on or after January 1, 2025.
That means any qualified overtime pay you earned on or after January 1, 2025, can potentially be deducted from your federal taxable income when you file your 2025 tax return.
Who Qualifies for No Tax on Tips, No Tax on Overtime
The rules for no tax on tips and no tax on overtime are different.
For the no tax on tips, this applies to voluntary tips given by customers from jobs that traditionally and customarily receive tips.
This will be reported on Form W-2, 1099-NEC, 1099-MISC, 1099-K, or reported by you on Form 4137.
Qualifying roles include servers, bartenders, hostesses, delivery drivers, spa workers and some gig workers.
Meanwhile, the no tax on overtime applies to those who receive overtime compensation that is required under the Fair Labor Standards Act (FLSA) and reported on a Form W-2 or 1099 (or other specified reporting).
The income limit phaseouts start at above $150,000 for single filers and $300,000 for joint filers.
How Does No Tax on Overtime Work
The no-tax-on-overtime-work provision is not a complete tax exemption for overtime pay.
Instead, it’s a federal income tax deduction for part of your overtime earnings, specifically the extra amount you get paid for working overtime hours.
The law creates a new deduction for what’s called “qualified overtime compensation” and applies to federal income tax only. Payroll taxes (like Social Security and Medicare) and most state taxes still apply as usual.
What People Are Saying
Michael Ryan, a finance expert and the founder of Michael Ryan, told Newsweek: “I'm genuinely surprised more people aren't freaking out about it. Employers basically got a free pass this year. The IRS said, "Yeah, we know you don't have the systems to report overtime and tips separately, so skip it for 2025. You're welcome." Starting this year, there'll be actual penalties if they don't do it right. But this year? Employees are just... figuring it out themselves. Which is bananas, honestly.”
Alex Beene, a financial literacy instructor for the University of Tennessee at Martin, told Newsweek: “Whenever tax benefits depend on workers scanning over pay stubs instead of relying on clearly reported categories, the likelihood of filing errors increases exponentially.”
What Happens Next
Those who make incorrect estimations on their taxes could face future penalties under the new no tax on tips and overtime.
“If you overestimate, best case scenario? You get a correction notice. The IRS recalculates what you actually owe and sends you a bill for the difference, plus interest. Not fun, but survivable,” Ryan said.
“Worst case? You owe more than $1,000 in back taxes because of your miscalculation, and now underpayment penalties apply. Or you're claiming tip deductions for unreported cash tips, and the IRS decides to dig into your FICA taxes. That's a 15.3 percent hit if you're self-employed, or 7.65 percent if you're a W-2 worker, going back potentially years. Plus penalties.”
He added: “This year is just... messy. Employers were supposed to be encouraged to provide estimates in Box 14 or separate statements so people wouldn't have to guess, but most of them didn't bother. So workers are out here doing mental math on their pay stubs, trying to figure out what counts as tips versus what doesn't, calculating overtime premiums, and honestly? A lot of people will get it wrong.”
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