Navigating the One Big Beautiful Bill: What It Means for Tips & Overtime
On July 4, President Trump signed the One Big Beautiful Bill (OBBB) into law, introducing a wide range of changes to the tax code and various government spending initiatives. To help make sense of what this means for you, we’ll be breaking down the key provisions and their implications in a series of blog posts.
In this post, we’ll take a closer look at the new federal tax deductions designed for workers who earn tips or overtime pay. These provisions could offer meaningful tax relief to millions of hourly and service industry employees, potentially lowering their taxable income and increasing their chances of receiving a larger tax refund at filing time.
Key Tax Breaks
- Tip Income Deduction: Workers who “customarily and regularly” receive tips, such as servers or hospitality workers, can now deduct up to $25,000 in tip income from their federal taxes. However, this is a deduction rather than an exclusion, so tip income must still be reported and may be subject to state and local taxes. It also does not affect Social Security or Medicare withholdings, which will continue to apply as usual.
- Overtime Deduction: Employees who work extra hours can deduct up to $12,500 of their overtime earnings. Like tips, overtime wages are still subject to state taxes and payroll withholdings.
These deductions apply to income earned starting January 1, 2025, and are currently set to expire December 31, 2028.
Note: Employees will not see these benefits reflected in their paychecks. The tax savings will be realized when they file their 2025 tax returns in 2026.
Who Qualifies?
- Workers earning up to $150,000 annually can claim the full deductions. Above that threshold, the deductions begin to phase out.
- Any income above the $25,000 (tips) or $12,500 (overtime) caps remains taxable.
What to Do Now
Update Payroll and Reporting Systems
- Track and classify your earnings accurately: Keep detailed records of tips and overtime, especially cash tips not shown on pay stubs. Make sure these are classified as separate pay types in your payroll system, not combined with regular wages.
- Adjust withholding expectations: Although federal income tax deductions apply to employees, employers still withhold taxes normally. Workers will see benefits during tax filing.
- Prepare for updated tax forms: The W-2 form will be revised for the 2025 tax year to reflect these new deductions, so stay alert for changes and work with payroll providers to ensure accurate year-end reporting. Employers may also need to update W-4 forms to reflect changes in employee withholding preferences once IRS guidance is released.
Review Tax Strategy and Deductions
- Evaluate eligibility for expanded credits: Businesses in hospitality, personal care, and food service may now qualify from an expanded employer FICA tip credit, which now includes beauty services like barbering and nail care.
- Consider Section 179 and bonus depreciation: The Bill increases the Section 179 expensing limit to $2.5 million and reinstates 100% bonus depreciation for qualified property placed in service after January 19, 2025. This could significantly reduce your taxable income if you’re planning capital investments.
- Explore enhanced child care credits: Employers can now claim up to $500,000 in tax credits—or $600,000 for qualified small businesses—for providing or subsidizing child care for employees. This expanded credit significantly increases the previous $150,000 cap, making it a powerful incentive to support working parents and improve workforce retention.
HTB’s tax professionals are here to help you make the most of these deductions while staying compliant with IRS and state rules. We will continue to share insights on the newly enacted OBBB in the coming weeks. Please reach out to us with any specific questions you may have for you and your business.