The recently signed “One Big Beautiful Bill” brings tax changes for employees and business owners, especially when it comes to the reduction of taxes on tips and overtime.  While most people have heard about those changes, the law includes several important details  that will affect your taxes in both 2025 and continue through 2028.

Here are some of the key takeaways for the new rules on tips and overtime pay:

New Tip Income Tax Deductions (2025-2028)

Under OBBB, employees and self-employed individuals working in tip-based industries may now qualify for a tax deduction on tips. Here’s what you need to know:

• Deduction amount: Effective 2025 through 2028, employees and self-employed individuals may be able to deduct up to $25,000 in qualified tips annually.
• Income limits:
  • The deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for married filing joint filers and married couples must file jointly to claim the deduction).   
  • The deduction will be reduced by $100 for each $1,000 by which the taxpayer’s modified adjusted gross income exceeds these thresholds. 
• Eligibility:
  • The term ‘qualified tips’ means tips received by an individual in an occupation which customarily and regularly received tips on or before December 31, 2024. Tips can be made in the form of cash, checks, gift cards and even casino chips. The proposed regulation issued in September 2025 lists numerous occupations that qualify for the deduction.
  • Under the proposed regulations, tips must be voluntary.  Mandatory service charges or automatic gratuities added to a customer’s bill are not eligible for the deduction.
  • Taxpayers do not need to itemize for the deduction.
•  For business: It’s still unclear whether employers will lose their own deductions for tip expenses. Expect further IRS guidance on this point.

New Overtime Pay Deduction

The OBBB also adds a deduction for overtime pay, designed to give relief to middle-income workers. Here’s how it works:

• Annual deduction amount:
  • Up to $12,500 for single filers.
  • Up to $25,000 for joint filers.
• What qualifies:
  • The deduction applies only to the “overtime portion” of your pay meaning the extra half of “time-and-a-half” compensation.
• Reporting requirements:
  • Employers must report all qualified overtime pay on W-2s (for employees) or Form 1099 (for contractors).   
• Who qualifies:
  • Overtime compensation must be required under section 7 of the Fair Labor Standards Act of 1938. 
  • Exempt employees (executive, professional and certain sales and computer-related roles) can’t claim this deduction.
• Taxpayers don’t need to itemize for the deduction.

What Employees Should Do

If you earn tips or overtime pay:

• Review if you’ll qualify for these new deductions in 2025.
• Consider your withholding or estimated tax payments so you don’t overpay or underpay. 

What Employers Should Do

If you manage payroll or own a business:

• Update your payroll systems to ensure proper tracking and reporting of tips and overtime pay.  
• Continue withholding income tax, Social Security and Medicare taxes on both types of pay. 

Need Help Navigating the New Rules?

As with any new tax law, expect there to be clarifications as we near year-end.  The professionals at Cray Kaiser can help you understand how OBBBA may impact your 2025 taxes, whether you are an employee, contractor or business owner. Contact us today to prepare your tax strategy for 2025.