By Denise M. Holmes, CPA, Partner
What employers need to know for accurate payroll reporting
On July 4th, 2025, H.R.1 (formerly, the One Big Beautiful Bill Act, OBBBA) was signed into law. H.R.1 extends many of the expiring provisions from the Tax Cuts and Jobs Act (TCJA) of 2017, but it also includes some new provisions including no tax on tips and overtime, subject to certain limitations.
New rules for tax on tips
Previously, income from tips and working overtime was considered taxable income, but effective 2025 to 2028 this is no longer the case.
Now up to $25,000 in qualified tips are deductible for employed and self-employed individuals. Qualified tips are voluntary cash or charged tips received from customers or through tip sharing. Only occupations listed by the Internal Revenue Service (IRS) as customarily and regularly receiving tips will qualify. The deduction phases out for single taxpayers with modified adjusted gross income over $150,000, and for joint filers over $300,000. This deduction is also available for both itemizing and non-itemizing taxpayers. Taxpayers can claim this deduction if the tips are reported on a Form W-2, Form 1099, another specified statement furnished to the individual, or directly by the taxpayer on Form 1437. This deduction expires in 2028.
New changes regarding tax on overtime
Taxpayers who receive qualified overtime compensation may deduct the amount of overtime pay deducted at “time-and-a-half” rates exceeding their regular hourly rate. There is a maximum annual deduction of $12,500 for single filers and $25,000 for joint filers. This deduction also phases out at $150,000 modified gross income for single taxpayers and $300,000 for joint filers. The overtime must be reported on Form W-2, Form 1099, or other specified statement furnished to the individual. The deduction is also available for both itemizing and non-itemizing taxpayers and expires in 2028.
Employer considerations
These new changes will affect businesses that have employees that receive tips and/or overtime. To ensure your employees receive the new tax benefits, you will need to report tips and overtime pay separately on W-2 Forms. This could require changes in payroll processing to ensure that tips and overtime are reported properly. Consider informing your employees about these deductions, so they may take advantage of the changes if they are eligible.
Questions on tax free tips or overtime changes specific to your business? This is an ideal time to consult your Keiter Opportunity Advisor, Email or Call: 804.747.0000
The Keiter Tax team will continue to share more details on H.R.1 business tax planning opportunities and updates as the IRS releases guidance.
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About the Author
Denise M. Holmes, CPA, Partner
Denise serves a wide variety of industries with a major concentration in healthcare and medical practices. She shares her industry knowledge and tax expertise with physicians to assist them in reaching their personal and business financial goals. Some of her specialty areas with Keiter include consulting, compliance and tax research for individuals, partnerships, and S Corporations. She is the leader of Keiter’s Construction niche team.
More Insights from Denise M. HolmesThe information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.
