One Big Beautiful Bill Act (OBBBA) - No Tax on Tips and No Tax on Overtime
The One Big Beautiful Bill Act was signed into law on July 4, 2025 and contains two important payroll and reporting changes you should know.
The One Big Beautiful Bill Act was signed into law on July 4, 2025 and contains two important payroll and reporting changes you should know:
- No Tax on Tips
- No Tax on Overtime
“No Tax” refers to federal income tax. That means employees will still owe Social Security tax and Medicare tax, as well as applicable state and local taxes, on their tips and OT compensation.
Important: Payroll should continue to withhold federal income tax from employees' overtime pay and tip income. The IRS will be modifying withholding procedures for tax years beginning after December 31, 2025.
Please see below for additional details on each of these provisions, both of which are effective through December 31, 2028.
"No Tax on Tips"
- New deduction: Effective for 2025 through 2028, employees and self-employed individuals may deduct qualified tips received in occupations that are listed by the IRS as customarily and regularly receiving tips on or before December 31, 2024, and that are reported on a Form W-2, Form 1099, or other specified statement furnished to the individual or reported directly by the individual on Form 4137.
- “Qualified tips” are voluntary cash or charged tips received from customers or through tip sharing.
- Maximum annual deduction is $25,000. For self-employed individuals, the deduction may not exceed the individual's net income (without regard to this deduction) from the trade or business in which the tips were earned.
- The deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).
- Taxpayer eligibility: The deduction is available for both itemizing and non-itemizing taxpayers.
- Self-employed individuals in a Specified Service Trade or Business (SSTB) under section 199A are not eligible. Employees whose employer is in an SSTB also are not eligible.
- To claim the deduction, taxpayers must:
- Include their Social Security Number on the return and
- File jointly if married.
- Reporting: Employers and other payors must file information returns (Form W-2, Form 1099) with the IRS (or SSA) and furnish statements to taxpayers showing certain tips received and the occupation of the tip recipient. Taxpayers will use the data on these forms to claim a tax deduction when they complete Form 1040, U.S. Individual Income Tax Return.
- Guidance: By October 2, 2025, the IRS must publish a list of occupations that “customarily and regularly” received tips on or before December 31, 2024.
- The IRS will provide additional guidance and transition relief for tax year 2025 for taxpayers claiming the deduction and for employers and payors subject to the new reporting requirements.
"No Tax on Overtime"
- New deduction: Effective for 2025 through 2028, individuals who receive qualified overtime compensation may deduct the pay that exceeds their regular rate of pay - such as the “half” portion of “time-and-a-half” compensation - that is required by the Fair Labor Standards Act (FLSA). For example, if an employee's regular rate of pay is $15 per hour, the employee's overtime rate (time and one-half) is $22.50 per hour. Only the $7.50 overtime premium for that hour may be deducted. The deduction is also limited to premium pay that is statutorily required under Section 7 of the Fair Labor Standards Act. Thus, additional overtime compensation paid pursuant to heightened state-law requirements or negotiated under collective bargaining agreements do not qualify for the deduction.
- Maximum annual deduction is $12,500 ($25,000 for joint filers).
- The deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).
- Taxpayer eligibility: The deduction is available for both itemizing and non-itemizing taxpayers.
- To claim the deduction, taxpayers must
- Include their Social Security Number on the return and
- File jointly if married.
- To claim the deduction, taxpayers must
- Reporting: Employers will be required to report qualified overtime compensation on Form W-2, Form 1099, or other specified statement furnished to the individual. Taxpayers will use the data on these forms to claim a tax deduction when they complete Form 1040, U.S. Individual Income Tax Return.
- Guidance: The IRS will provide additional guidance and transition relief for tax year 2025 for taxpayers claiming the deduction and for employers and other payors subject to the new reporting requirements.
Please reach out to your dedicated Payroll Service Representative with any questions.
This information is based on IRS guidance issued in connection with the One Big Beautiful Bill Act. For complete details, visit the IRS announcement: irs.gov/newsroom/one-big-beautiful-bill-act-tax-deductions-for-working-americans-and-seniors.