On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) was signed into law. Among the many provisions in the legislative package are two temporary employee deductions concerning tips and overtime. These will involve administrative, record-keeping, and reporting requirements on the part of employers.
Five Fast Facts Applicable to Both Deductions
Eligible employees, those who earn qualified tips or qualified overtime, are permitted to claim the deductions for tax years 2025 through 2028. Five fast facts to know now include:
- The employee deductions may be utilized whether an employee claims the standard deduction or chooses to itemize their deductions.
- The allowable deduction for both tips and overtime is reduced for earners with adjusted gross income (AGI) exceeding $150,000 (single filer) or $300,000 (joint return); specifically, for each additional $1,000 over the AGI, the allowable deduction is reduced by $100.
- Employees are required to provide a social security number on their tax returns to be eligible for either deduction.
- The IRS will amend the Form W-2 in order for employers to report required information for employees.
- Starting with the 2026 tax year, the IRS will update its withholding procedures in order to account for the new temporary deductions. Thus, employers are not immediately required to modify employment procedures related to withholdings at this time.
Details specific to the tips and overtime deductions are outlined below.
No Tax on Tips (Sec. 70201)
The “No Tax on Tips” employee deduction is for qualified tips earned by employees and self-employed individuals who are “customarily and regularly receiving tips” during the taxable year. The IRS is expected to publish a list of occupations that meet this definition by October 2, 2025. To count as a qualified tip for the purposes of the deduction, the tip must be voluntarily given by the customer, not negotiated, and not determined by the payor. For example, automatic gratuity included on a restaurant bill would not qualify for the deduction.
Qualified tips cannot be earned in the following specified trade or businesses: health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset is the reputation or skill of one or more of its employees. The deduction does apply to tips earned through tip pooling or sharing arrangements, and the maximum employee deduction is $25,000.
No Tax on Overtime (Sec. 70202)
The “No Tax on Overtime” deduction is an employee deduction for qualified overtime compensation received during the taxable year. The deduction amount is capped at $12,500 for single filers or $25,000 for a joint return. For the purposes of the deduction, “qualified overtime” is defined as overtime that is required by Section 7 of the Fair Labor Standards Act (“FLSA”). Generally, the FLSA requires that nonexempt employees must receive pay at a rate of one and one half times their regular rate of pay for hours work in excess of 40 hours in a given workweek.
This means, for example, that certain overtime agreed to in a collective bargaining agreement that is not required by Section 7 of the FLSA may not count as “qualified overtime” for the purposes of the deduction.
What Steps Should Employers Take Today?
At this time, employers should review internal processes and reach out to their payroll companies to ensure that they can track and report qualified tips and FLSA-required overtime. This information may be reported to employees on Form W-2 (or other specified statement) for the 2025 tax filing season.
Paige Eggleston is a dedicated labor and employment attorney who brings both public and private sector experience to her work. Known for her ability to cut through complexity, she delivers practical, people-centered solutions—whether advising on employee discipline, disability accommodations, leave matters, FLSA compliance, collective bargaining, or municipal labor issues. For more information, or if you have questions about how these deductions may affect your payroll reporting, please contact Paige at peggleston@bernsteinshur.com.