The new year is quickly approaching, which means it is almost time for individuals and employers to finalize their 2025 tax planning and reporting. The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, created two new federal income tax deductions both employees and employers will want to consider regarding qualified overtime pay and tips that individuals may claim on their 2025 tax returns.
No Tax on Overtime
- Employees may deduct up to $12,500 ($25,000 for joint filers) in qualified overtime pay from their federal taxable income. Qualified overtime is considered the premium portion of overtime pay.
- Qualified overtime does not include premiums required only under state law, paid voluntarily by an employer, or paid pursuant to a collective bargaining agreement.
- Employers are responsible for filing information returns with the IRS and providing statements to employees showing the total amount of qualified overtime paid during the year.
No Tax on Tips
- Employees who ordinarily receive cash or charge tips may deduct up to $25,000 in qualified tips from their federal taxable income.
- Qualified tips do not include involuntarily amounts, such as automatic gratuities.
- Employers are responsible for filing information returns with the IRS showing the total amount of qualified tips paid during the year.
- Employers are still responsible for the employer share of payroll taxes on qualified tips.
Employers should be prepared to file information returns and to provide itemized statements to employees showing the total amount of qualified overtime pay or tips. Itemized statements should be provided to any employee who receives overtime or tips, even if the employee makes more than the adjusted gross income threshold for each new deduction. As such, employers should consider the following questions related to their accounting and payroll practices:
- Do your withholding requirements and payroll practices account for these deductions?
- Do you keep detailed records of employee overtime hours and compensation?
- Can you easily identify the premium portion of qualified overtime pay for each employee?
- Can you easily identify the qualified tips for each employee?
If you have any questions about this Legal Update or your payroll practices as a result of the One Big Beautiful Bill Act, please contact Attorney Aleah Loll at aloll@buelowvetter.com or 262-409-7313, or your Buelow Vetter attorney.
