The One Big Beautiful Bill Act was signed into law on July 4, 2025, as Public Law 119-21. Here is a breakdown of the Tax changes for Tips and Overtime.
Federal Tax Changes for Tips: There is a new deduction for qualified tips for the years 2025 through 2028 that are reports on a Form W-2, Form 1099, or other specified statement given to the individual, or reported by the individual on a Form 4137.
- “Qualified tips” are voluntary cash or charged tips received from customers or through tip sharing.
- The maximum annual deduction is $25,000; for self-employed, 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).
The law states that the IRS must publish a list of occupations that “customarily and regularly” received tips on or before December 31, 2024. The IRS will provide transition relief for tax year 2025 for taxpayers claiming the deduction and for employers and payors subject to the new reporting requirements.
Federal Tax Changes for Overtime: 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) and that is reported on a Form W-2, Form 1099, or other specified statement furnished to the individual.
- The 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).
The IRS will provide transition relief for tax year 2025 for taxpayers claiming the deduction, and for employers and other payors subject to the new reporting requirements.
Other Federal Tax Law Changes: Though not discussed in this article, the IRS link contains additional information concerning tax law changes for car loan interest and a new deduction for senior citizens whose modified adjusted gross income is $75,000 or less ($150,000 or less for joint filers).
Further information can be found on the IRS website at: https://www.irs.gov/newsroom/one-big-beautiful-bill-act-tax-deductions-for-working-americans-and-seniors
Here at Rocket City HR Consulting, we can assist you in conducting an HR audit to identify risks and/or review and revise your policies and employee handbook to ensure compliance with current laws and regulations. We also have skilled HR professionals who can assist you in all areas of human resources, including forms and checklists to streamline your HR processes, providing HR Consulting services on a contract basis, or for a one-time training need or project.
By Karen Burton, SHRM-SCP, SPHR
