Employer Guidance for New Tax Deductions for Tips and Overtime Pay
Employer Guidance for New Tax Deductions for Tips and Overtime Pay
Here are the key things that employers should know:
No Tax on Tips
The OBBBA allows a deduction of up to $25,000 for "qualified tips," regardless of filing status. To be considered a "qualified tip" subject to the deduction, the tip must be a voluntary tip received by an individual in an occupation that customarily and regularly received tips prior to the enactment of the OBBBA. This means employers cannot craft novel pay arrangements for traditionally non-tipped positions in response to the law.
No Tax on Overtime
Separately, the OBBBA allows a deduction of up to $12,500 per employee ($25,000 if married) for certain overtime payments received by the employee.
Importantly, the deduction is limited to "qualified overtime compensation" required to be paid under the Fair Labor Standards Act ("FLSA”), meaning overtime for hours worked in a week over 40 hours. Both the "No Tax on Tips" and "No Tax on Overtime" deductions begin to phase out for taxpayers earning over $150,000 (or $300,000 if married).
New Employer Responsibilities
Because these changes are retroactive to January 1, 2025, employers should be prepared to implement them for the full 2025 tax year. The IRS has stated that Forms W-2 and 1099-NEC will not change to reflect new reporting requirements until 2026, and additional information will be provided in the coming months explaining how taxpayers can claim the OBBBA related benefits for 2025 under existing forms and withholding guidelines.These new tracking and reporting requirements could prove more challenging to implement than might initially be expected. In sum, though these new tax deductions offer meaningful tax relief for certain types of workers, employers' key role is successful implementation comes with new compliance obligations and reporting burdens. Early preparation and clear communication with employees and payroll providers will be critical.
This document is designed for general information only. The information presented in this document should not be construed to be formal legal or tax advice nor the formation of a lawyer/client relationship.
For more information on this and other topics, please contact Kevin via any of the channels listed below:
📧 kevin@kmckernan.com | 📞 718-317-5007