Compliance updates, analysis, plus HR and payroll best practices from HR One
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| Eligible employees will be responsible for claiming the deductions when filing their taxes. |
Congress has passed, and the President has signed, H.R. 1, referred to as the “One Big Beautiful Bill,” which includes changes to how tips and overtime pay are taxed. These changes take the form of federal income tax deductions that employees will claim when filing their taxes and are retroactive to January 1, 2025. The provisions are set to run through 2028, unless extended by Congress.
If you have tipped workers or employees who are non-exempt and eligible for overtime pay, here’s what you should know:
What’s Changing
Tips: Employees in jobs that “customarily and regularly receive tips” can deduct up to $25,000 in cash tips from their federal taxable income ($50,000 for joint filers), as long as their total income is under $150,000 ($300,000 joint). Only voluntary tips qualify, mandatory service charges do not.
Overtime: Employees can deduct the premium portion of overtime pay (the additional half of the time and a half required under the Fair Labor Standards Act) from their federal taxable income, up to $12,500 per year ($25,000 joint), subject to the same income caps.
There is a phase out to the allowable amount of deductions, which is reduced by $100 for every $1,000 of income over the $150,000/300,000 cap.
What Employees Will Notice
These are deductions employees will have to claim when filing their taxes, not changes to payroll withholding, so an employee will not see any immediate changes to what’s in their paycheck.
More Guidance Is Coming
The IRS and Treasury Department are expected to issue regulations and guidance within 90 days of the bill being signed, which will include:
Definitions of “customarily and regularly tipped” occupations
Clarification on what qualifies as a “voluntary tip”
How tips and overtime earnings should be tracked and reported on year-end tax forms
Bottom Line
These are deductions employees can claim when filing their taxes, not a change to how taxes are withheld. Employers will need to track and report overtime separately on W-2 forms, but in most cases the employer’s payroll provider will be making those changes behind the scenes and will reach out to their clients with any specific guidance.
HR One will provide additional guidance on the IRS/Treasury regulations and any changes to Payentry as information becomes available.