OBBBA (One Big Beautiful Bill Act)
The federal law enacted in 2025 that created above-the-line deductions for qualified tips and overtime premium pay, among other tax changes, for tax years 2025 through 2028.
Qualified tips
Tips voluntarily paid by a customer to a worker in a traditionally tipped occupation. Mandatory service charges and auto-gratuities are classified as wages, not tips, and don't qualify.
Tip deduction cap
$25,000 per return — the most a filer can deduct in qualified tip income under the OBBBA, before any phase-out.
Overtime deduction cap
Up to $12,500 for single and head-of-household filers, or $25,000 for married filing jointly — the maximum overtime premium pay a filer can deduct before phase-out.
MAGI (Modified Adjusted Gross Income)
The income measure the OBBBA phase-out is based on. The tip and overtime deductions start phasing out once MAGI exceeds $150,000 (single/HOH) or $300,000 (married filing jointly).
Phase-out
The gradual reduction of the tip and overtime deductions once MAGI crosses the threshold above — 6 cents of deduction lost for every dollar of MAGI above it.
Above-the-line deduction
A deduction taken before calculating adjusted gross income, meaning you don't need to itemize to claim it. Both the tip and overtime deductions are above-the-line.
FICA
Federal Insurance Contributions Act taxes — Social Security and Medicare — withheld from wages regardless of the OBBBA deduction. The OBBBA reduces federal income tax, not FICA.
Medicare tax
1.45% of all wages, with no wage-base cap, paid by both employee and employer.
Additional Medicare Tax
An extra 0.9% Medicare tax withheld once wages exceed $200,000 (single) or $250,000 (married filing jointly).
State conformity
Whether a state's income tax code follows the federal OBBBA deduction. A conforming state exempts tips/overtime from state tax the same way the federal government does; a non-conforming state does not.
Rolling conformity
A state tax code design that automatically adopts federal tax law changes unless the state legislature acts to decouple from them.
Static (fixed-date) conformity
A state tax code that only follows the federal code as it existed on a specific date, requiring new legislation to adopt any later federal change like the OBBBA.
Decoupling
When a state legislature passes a law to not follow a specific federal tax change, or specifically chooses not to update its conformity date to pick it up.
W-4 Line 4b
The 'Other Adjustments — Deductions' line on Form W-4 where you enter your expected annual OBBBA deduction so your employer withholds less federal income tax per paycheck.
W-4 Line 4c
The 'Extra withholding' line on Form W-4 — the opposite of Line 4b. Entering an amount here increases withholding; it should not be used for the OBBBA deduction.
FLSA (Fair Labor Standards Act)
The federal law that requires overtime pay (1.5× the regular rate) for non-exempt employees who work more than 40 hours in a workweek. Only FLSA-required overtime qualifies for the OBBBA overtime deduction.
FLSA-exempt employee
A worker (typically salaried managers and professionals meeting specific duties tests) who isn't entitled to FLSA overtime pay. FLSA-exempt employees don't qualify for the overtime deduction even if they work long hours.
Self-employment tax (SE tax)
The 15.3% combined Social Security and Medicare tax self-employed workers pay on net earnings, since there's no employer to split it with.
Net income cap (self-employed tip deduction)
For self-employed tipped workers, the tip deduction cannot exceed net income from the business where the tips were earned, even if total tips received were higher.
Quarterly estimated tax payments
Tax payments self-employed workers make four times a year (mid-April, mid-June, mid-September, and mid-January) since no employer withholds tax on their behalf.
Sunset date
The OBBBA tip and overtime deductions are scheduled to expire after tax year 2028 unless Congress passes new legislation to extend them.
Filing status
Single, married filing jointly (MFJ), or head of household (HOH) — determines your tax brackets and the OBBBA deduction caps/phase-out thresholds that apply to you.
Mandatory service charge / auto-gratuity
A fee automatically added to a bill (common for large parties) that the IRS classifies as wages, not a voluntary tip — so it doesn't qualify for the tip deduction even if later distributed to staff.
Social Security tax
6.2% of wages up to the annual wage base ($184,500 for 2026), paid by both employee and employer.