Perspectives

New Federal Deductions on Tips and Overtime: What Employers Need to Know About the One Big Beautiful Bill

Employment , Practice Highlights , The Compliance Center , WFJ Business Services WFJ Law Firm

On July 4th, 2025, President Donald Trump signed the One Big Beautiful Bill-a sweeping federal tax package that includes two headline-grabbing provisions: a new deduction for qualified tips and another for qualified overtime pay.

While these deductions are marketed as middle-class tax relief, they bring significant payroll and compliance changes for employers. Here’s what your business needs to know now-and how to prepare for what’s next.

Tip Deduction: Up to $25,000 for Eligible Employees

Employees in jobs that customarily and regularly receive tips-think hospitality or food service-can now deduct up to $25,000 in qualified tips from their taxable income.

To qualify:

  • The tip must be voluntary, non-negotiable, and determined by the customer. 
  • It must be received in 2025 or later while the provision is in effect (2025–2028).
  • The deduction is reduced for high earners: $100 less for every $1,000 earned over $150,000 ($300,000 if filing jointly).

However, not all tip-based professions qualify. Employees in fields such as law, medicine, finance, performing arts, and consulting are excluded from this deduction. * (see the end of the post for a more comprehensive list of included fields.)

What this means for employers:

  • You must report both the amount of cash tips received and the employee’s qualifying occupation on their W-2.
  • FICA withholding and employer obligations for tips still apply.
  • The deduction applies retroactively, so 2025 tips are already in scope.

Overtime Deduction: Up to $12,500 Per Employee

Non-exempt employees under the FLSA who work more than 40 hours per week can now deduct up to $12,500 in qualified overtime pay from their taxable income ($25,000 on a joint return). As with tips, the deduction phases out at higher income levels.

“Qualified overtime” must exceed the employee’s regular rate and be mandated under federal law. It cannot be counted as a qualified tip.

Employer impact:

  • You must separately report total qualified overtime on W-2s and possibly Form 1099.
  • Updated IRS withholding tables will take affect starting 2026.
  • Like the tip deduction, this rule is retroactive for 2025 pay.

Key Takeaways for Employers

These new deductions may increase employee interest in reporting overtime and tips-but that accuracy comes with added responsibility for your business.

Here’s what you’ll need to watch:

  • Payroll reporting updates: new W-2 data fields will require software and process updates.
  • Recordkeeping requirements: Detailed tracking of qualifying wages, occupations, and hours worked is essential.
  • Expiration timeline: These provisions are set to end after 2028 unless extended, so employers should prepare for both implementation and sunsetting.
  • Behavioral shifts: More employees may seek tipped or overtime work, which could ease staffing gaps but also raise overtime costs.
  • State taxes: These are federal deductions only-your state tax obligations may not change.

What Comes Next from the Treasury

The law directs U.S. Treasury (via the IRS) to:

  • Publish a list of eligible tipped occupations within 90 days.
  • Issue regulations to prevent misclassification of wages as tips.
  • Provide new withholding guidance starting in 2026.
  • Allow employers to use reasonable estimation methods to comply during the 2025 transition period.

How WFJ Can Help

Industries like hospitality, healthcare, retail, construction, and service are likely to feel the biggest impact from these changes. But any business with tipped or non-exempt employees should take note.

The WFJ Compliance Center is monitoring IRS rulemaking closely and can help your business:

  • Interpret the new federal requirements
  • Adjust internal systems and payroll process
  • Maintain compliance and avoid reporting errors

If your team is affected by these new provisions, now is the time to act. Contact us today to get ahead of these changes and ensure your reporting compliance practices are ready for what’s next.

*Additional fields excluded from tip deductions

  • health
  • law
  • engineering
  • architecture
  • accounting
  • actuarial science
  • performing arts
  • consulting
  • athletics
  • financial services
  • any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees
  • investing
  • investing management
  • trading
  • dealing in securities partnership interests
  • commodities

 

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