What’s next for tax on tips and overtime wages?
July 16, 2025
Publications
With the passage of President Trump’s signature One Big Beautiful Bill, all the chatter about eliminating tax on tips and overtime wages has become something of a reality. However, the details of how the elimination of these taxes will work, and what obligations this may impose on employers, are worth a closer look.
Key takeaway for employers
What do employers need to know about the elimination of tax on tips and overtime? For starters, employers should continue to pay ordinary employment taxes on tips and overtime wages. The elimination of the tax comes in the form of an exemption employees will now be eligible for – up to $25,000 for tipped employees and up to $12,500 for qualifying overtime compensation – which employees may claim on their personal income taxes beginning with tax year 2025.
“The elimination of tax on tips and overtime isn’t automatic — it’s an exemption employees claim on their own taxes.”
How the overtime exemption works
For overtime wages, the Beautiful Bill permits employees to deduct up to $12,500 in “qualifying overtime compensation” from their taxable income. You may ask, “What is ‘qualifying overtime compensation?’” It is overtime that is mandated by the Fair Labor Standards Act. In other words, it is not overtime that is paid to an employee because of an employer’s policy to pay overtime for weekend work, for instance, or for daily overtime that might be paid pursuant to a collective bargaining agreement. It is only overtime that is legally required by the FLSA. Employers will be required to identify this specific overtime pay separately on employee W-2s, beginning with tax year 2025.
How the tip exemption works
Similarly, the Big Beautiful Bill permits employees who “customarily and regularly” receive tips to deduct up to $25,000 of tips from their taxable income. This amount is reduced by $100 for each $1,000 that an employee’s adjusted gross income exceeds $150,000 (or $300,000 for joint filers). The Bill also expands employers’ ability to take tip credits on FICA taxes beyond food service employees, and now includes tipped employees in the beauty service business.
What’s next?
We hope to get more guidance soon on how these tax credits will work and how employers must identify these now tax-exempt wages on their W-2s. If you have questions about the One Big Beautiful Bill or how it may impact your organization, you should reach out to any member of the McNees Labor & Employment Group.
