Overtime & Tips: New Tax Breaks That Could Save Workers Thousands. If Payroll Gets It Right.
Unlock big savings for your team with the latest tax breaks on overtime and tips, if payroll gets it right, workers could see thousands back in their pockets.
Amanda Crisostomo
8/28/20251 min read
The recently passed One Big Beautiful Bill brought a wave of tax changes, but two stand out for employees in hospitality, retail, and other hourly-wage industries:
No Tax on Tips Deduction: Up to $25,000 deductible for tips (income tax only, not payroll taxes).
Overtime Deduction: Up to $25,000 deductible for overtime income, with income caps.
Both could put real money back in employees’ pockets, but only if their payroll is set up correctly.
What the Law Says:
These deductions are income tax deductions, payroll taxes (FICA) still apply.
Both require precise categorization of wages in payroll records.
Incorrect W-2 reporting could cause employees to lose the benefit or trigger IRS corrections.
Why Payroll Accuracy Matters More Than Ever:
Most payroll mistakes aren’t intentional, they happen when overtime or tips get lumped into “regular wages” or coded incorrectly. Under the new rules, the IRS will be watching those codes closely.
Action Steps for Employers:
Review Payroll Categories – Make sure overtime and tips have their own codes in your payroll software.
Check Your W-2 Mapping – Ensure those categories flow into the correct W-2 boxes.
Educate Your Team – Let employees know about the deductions and the importance of reporting tips accurately.
Frequently Asked Questions:
1. What is the No Tax on Tips Deduction?
The No Tax on Tips Deduction allows eligible employees to deduct up to $25,000 in qualifying tip income from their federal taxable income. This deduction applies to income taxes only and does not eliminate Social Security and Medicare (FICA) taxes on tips.
2. Does this mean tips are completely tax-free?
No. Tips are still subject to payroll taxes (FICA). The deduction applies only to federal income taxes and may reduce the amount of taxable income reported on your tax return.
3. What is the Overtime Deduction?
The Overtime Deduction allows eligible employees to deduct up to $25,000 of qualifying overtime income from their federal taxable income, subject to income limitations and other eligibility requirements.
4. Who qualifies for these deductions?
Eligibility depends on factors such as occupation, income level, and whether wages, tips, and overtime are properly reported through payroll. Employees should consult a tax professional regarding their specific situation.
Have questions? Need help checking your payroll setup? Contact us. We’ll help you get it right.
