Understanding the “No Tax on Tips & Overtime” Provisions Under the OBBBA with Jackson Lewis P.C.
Signed into law on July 4, 2025, the One Big Beautiful Bill Act (OBBBA) includes new temporary tax deductions for both tipped income and overtime premiums, available through the 2028 tax year.
What the Law Does
- Tip deduction: Employees in traditionally tipped industries (like restaurants, hotels, beauty services) can deduct up to $25,000 of reported tips per year.
- Overtime deduction: Only the overtime “premium” pay (extra “half-pay” premium above regular wages) is deductible, capped at $12,500 per year (or $25,000 for married joint filers).
New Reporting & Payroll Requirements
- Employers must now track and report qualified tips and overtime premiums on employees’ Form W-2 (and 1099s for non-employees), among other recordkeeping changes.
- Payroll systems will need updates to capture these details and enforce annual caps; employers should prepare for new IRS guidance and changes to withholding procedures for the 2026 tax year.
Employer Action Steps
- Review and update payroll systems to accurately track tips and overtime premiums.
- Consult with legal or tax counsel before altering compensation or classification policies—missteps could lead to compliance issues.
- Monitor IRS guidance, especially for W-2 and withholding updates anticipated in late 2025.
Industry Implications
- Restaurants and hospitality companies may consider restructuring pay to maximize tax-free income—though changes should be carefully evaluated for long-term impact and and other compliance requirements.
- Pay transparency between tipped and non-tipped workers may increase, potentially prompting reevaluation of compensation models.
Bottom Line: The OBBBA introduces helpful tax breaks for tipped and overtime workers—even retroactively for 2025—but brings new reporting responsibilities and compliance complexities. Employers should act now to prepare, update systems, and stay connected with evolving IRS guidance.
For additional questions or assistance in navigating these changes, Contact Andrew Bellwoar with Jackson Lewis P.C.