On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBBA), bringing two landmark provisions into law—both effective retroactively for the 2025 tax year and expiring December 31, 2028:
1. ✅ No Tax on Tips (Cash/Charged)
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Up to $25,000 in tips per employee can now be deducted above the line, reducing taxable income
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Phase‑out begins at $150,000 AGI (single) / $300,000 (joint)—losing $100 of deduction per $1K over threshold .
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Only “qualified tips” apply: voluntary, non-negotiated, paid by the patron and customary before 2025—employer-mandated service charges don’t count
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Both cash and charged tips are included, but “non-cash” gratuities like gift baskets aren’t eligible
Employer responsibilities:
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Report total tip income and employee occupation on Forms W‑2 and 1099
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Update payroll/reporting systems to track qualified tips separately.
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Be mindful of existing tip-pooling and minimum-wage regulations—consult legal counsel before adjusting structures
2. ⏱️ No Tax on Overtime Premiums
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A deduction of up to $12,500 (single) or $25,000 (joint) on the overtime “premium” (i.e., the additional half-time portion) is now available—again, above the line
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Same AGI phase-out thresholds as tips apply
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Does not include Social Security or Medicare tax relief—only federal income tax
Employer responsibilities:
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Break out qualified overtime compensation separately on employees’ W‑2s and 1099s .
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Maintain clear records of hours and pay rates to avoid misclassification (e.g., reducing base rate to produce premiums artificially) .
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Adjust payroll systems and W‑2 processes for compliance.
3. 👷 What This Means for Employers
✅ Pros:
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Highly visible way to boost take-home pay for tipped and overtime-eligible workers.
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Can enhance retention and morale in service-intensive and hourly-heavy sectors.
⚠️ Challenges:
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Payroll & reporting upgrades: Tools must flag, calculate, and output separate tip and overtime premium amounts.
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Administrative complexity: Employers must define “qualified” tips/overtime and monitor AGI thresholds.
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Legal compliance risk: Any misuse—like reclassifying salary as overtime—may trigger FLSA or IRS audits
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State/local inconsistencies: Overtime rules vary across jurisdictions—federal deduction won’t override state obligations
4. 🔄 Air on the Side of Due Diligence
As these deductions will reshuffle taxable income reporting and payroll processes, it’s critical for employers to:
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Consult tax advisors and legal counsel to navigate definitions and compliance.
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Audit payroll systems now to ensure proper tracking and separate reporting by January 2026.
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Train payroll and HR staff on the new line-item requirements in W‑2s/1099s.
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Communicate with employees clearly about what qualifies and how deductions affect their withholding and take-home pay.
Bottom Line
The “no tax on tips and overtime” policies offer meaningful tax relief to many service and hourly workers. But employers shoulder the bulk of the implementation burden—payroll updates, compliance, training, and policy adjustments. Done right, this could translate to a powerful retention tool. Done sloppily, it could lead to compliance headaches.
