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:
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:
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.
For 2025:
For 2026:
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?
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.
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!
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📧 Email us at payroll@paysteady.com