On July 4, 2025, President Trump signed the “One Big Beautiful Bill Act” into law. While there are many provisions in this Act that have widespread impacts, we are focusing this article on upcoming changes to taxation of tips and overtime. Please note that the Treasury Secretary is expected to publish additional rules and regulations regarding this deduction, which is effective for the 2025-2028 tax years.

Employers should be aware of the following changes:

Qualified Tips Deduction

• Employees may deduct up to $25,000 in “qualified tips” from federal taxable income. Deductions for employees earning more than $150,000 in gross income per year ($300,000 for joint returns) are reduced by $100 for each $1,000 earned in excess of these thresholds.
• To be considered a “qualified tip,” the tip must be a cash or charged tip paid voluntarily with the amount solely determined by the payor. Mandatory service charges, required gratuities, or tangible items (gifts) do not qualify for this deduction. In addition, the tips must be received in an occupation that “customarily and regularly” received tips prior to December 31, 2024.
• Tips received for providing certain services, including, but not limited to, services provided in health, law, accounting, financial, or brokerage industries, do not qualify for this deduction.

Qualified Overtime Deduction

• Employees may deduct up to $12,500 ($25,000 for joint returns) in “qualified overtime” from federal taxable income. Deductions for employees earning more than $150,000 in gross income per year ($300,000 for joint returns) are reduced by $100 for each $1,000 earned in excess of these thresholds.
• To be considered “qualified overtime,” the overtime compensation must be required by the Fair Labor Standards Act (FLSA) and only the amount in excess of the regular rate of pay is allowed to be deducted. This means that overtime required only by state law or collective bargaining agreements are not deductible.

Guidance for Employers

With respect to tipped employees, employers must include the employees’ “qualifying occupation” and “qualified tips” paid to employees on Form W-2s. With respect to overtime compensation, employers must separately list the total amount of “qualified overtime” on Form W-2s.

Affected employers are encouraged to:

• work with their payroll provider or ensure internal payroll systems properly track and report these amounts;
• consider notifying employees of these changes and provide an easy process for employees to revise Form W-4s; and
• consult a tax professional for additional information.

Please note the information provided is for informational purposes only and may not reflect the most current regulatory developments.  We strive to keep our materials up to date, but there may be occasions when information becomes outdated.  Users are encouraged to verify the applicability of the content before relying on it for decision-making.  If you have any questions or concerns regarding the accuracy or relevance of the information, please contact us directly for assistance.