Employees and employers nationwide are wondering about tax on tips and tax on overtime after H.R.1, also known as The One Big Beautiful Bill Act, was enacted on July 4, 2025. This Act included several changes that will affect payroll for the year 2025 and forward. These two deductions relating to tips and overtime are retroactive to January 1, 2025, meaning this Act encompasses all wages in these categories paid for 2025, not just after the passing of the Act.
Will Tips be Taxed?
The “No Tax on Tips” section of the Act provides a deduction for employees and self-employed individuals who receive tips. To qualify for the deduction, the tips wages must be reported on a W-2, 1099, or other statement specifying the amount received, and will be reported on Form 4137 when filing annual federal taxes.
If the employer, or self-employed person, is a Specified Service Trade or Business, they are not eligible for the deduction. Additionally, the IRS will be providing a list of qualifying occupations that receive tips, and those using the deduction will need to be engaged in an approved occupation. This list is due to be furnished by the IRS in October of 2025.
Will Overtime be Taxed?
Like tip income, the “No Tax on Overtime” portion of the Act provides a deduction for individuals who receive qualified overtime – this means the overtime pay is required by the Fair Labor Standards Act (FSLA) and must be reported on a W-2, 1099, or other specifying statement. Employers are required to furnish statements to the taxpayer (employee, for example), as well as the IRS.
In conclusion, while taxes will still be deducted throughout the year on tips and overtime, a deduction will be applied to an individual’s tax return at year-end for wages that qualify for the deduction. Qualified wages must be reported on a W-2, 1099, or other specified statement to be properly deducted.
These deductions do not reduce taxable income at the time the income is earned, so employees and employers must still continue to collect and remit applicable taxes on these wages.
If you’re an employer with questions about how to make sure year-end reports properly reflect different wages, get in touch with us!