The Big Beautiful Bill Changes to Tip and Overtime Taxes

On July 4th, 2025, the Big Beautiful Bill was signed into law — and it’s shaking things up for how tips and overtime are taxed. You’ve probably seen the headlines: “No tax on tips!” “No tax on overtime!” Sounds amazing, right? Well, yes . . . but the truth is there’s more to it than a flashy headline. Let’s break it down:

Tips Get a Federal Tax Break

Effective for tax years 2025 through 2028, certain tipped workers can deduct up to $25,000 in qualified tips from their federal income tax. “Qualified tips” are cash tips earned by someone working in an occupation that customarily received tips as of December 31, 2024. The Treasury Secretary must publish a list of qualifying occupations within 90 days of the Act’s enactment.

Other notable details:

• ✅ Both charged tips and pooled tips count.
• ✅ Income limits apply — the deduction phases out at $150K for single filers and $300K for joint filers.
• ✅ Employees don’t need to itemize; they just claim it on their tax return.
•  

Overtime Premiums Also Get a Break

Also effective for tax years 2025 through 2028, eligible workers can deduct up to $12,500 (single) or $25,000 (joint) from their federal income tax — but only for the premium part of overtime. That’s the extra 0.5x you pay beyond their normal hourly rate. So if you pay time-and-a-half, the “time” part is still taxable; the “half” part is what gets the deduction.

What These Changes Mean for Employers

For 2025:

• ✅ No major payroll system changes needed.
• ✅ Use a “reasonable method” approved by the Treasury Secretary to estimate qualified overtime and tips.
• ✅ Keep withholding federal income tax, Social Security, and Medicare as usual — employees get their tax break when they file.

For 2026:

• ✅ You will need to report qualified tips and overtime separately on W‑2s and 1099s.
• ✅ Work with PaySteady and your accountant to prepare for this.
•  

FAQs

Do I need to change payroll now?

No, keep doing what you’re doing for 2025.

Do I still withhold taxes on tips and overtime?

Yes, no changes here.

Does this affect state taxes?

Not automatically since this is a federal change. Some states might follow suit, but you’ll need to check your local rules.

Do service charges count as tips?

No, service charges and mandatory gratuities are still taxed like regular wages.

Who’s eligible?

• Tips: Up to $25K for Treasury-defined tipped jobs.
  
  
• Overtime: Up to $12.5K single / $25K joint for the overtime premium portion. Same income limits apply.
  
  

Does this change apply to wages earned after the bill was passed or to all of 2025?

Both deductions are effective retroactive to January 1, 2025.

Questions?

You don’t need to overhaul payroll today but you do want to be ready for 2026 when the reporting rules change. We’ll keep you posted on the relevant details as they become available. If you have any questions in the meantime, please reach out!

📞 Call us at (703) 672-1225

📧 Email us at payroll@paysteady.com