I may be revealing too much of my age and tastes by quoting this song, but I’ll “sing” it for you anyway: “Workin’ 9 to 5, what a way to make a living…”
You know that one from good ol’ Dolly Parton? If you end up humming it all day, too – you’re welcome. 🙂
But, as we both know, the modern workday doesn’t always fit into that tidy little box. Definitely not for you as a hardworking Kansas City Metro business owner… and not for a lot of employees either.
So overtime hours happen: deadlines loom, big projects pop up, or peak season hits. When your people put in those extra hours, you have to make sure payroll is handled just right.
Which has recently changed, due to the One Big Beautiful Bill Act (OBBBA). More on that in a second. First, I want to put in front of you the OBBBA provisions you should have your eye on right now for your business strategy:
- 100 percent bonus depreciation: You can immediately deduct the full cost of eligible new or used business assets in the year they’re placed in service.
- Section 174 research and experimental costs: Certain R&E expenses now must be capitalized and amortized (5 years for domestic, 15 years for foreign) instead of written off immediately.
- Section 163(j) limitation on business interest expense: Business interest deductions are capped at 30 percent of adjusted taxable income.
- Section 199A deduction for pass-through businesses: Deduct up to 20 percent of qualified business income (QBI), potentially lowering your effective tax rate.
Those are the big wins that you should be talking about right now with your tax professional. Because they’re the provisions that are going to make some of the biggest difference to your bottom line.
Now, the no taxes on overtime/tips provision might not pad your bottom line the way bonus depreciation does… but it will affect how you run payroll and withhold taxes.
And if you get it wrong, the IRS won’t be humming to Dolly Parton along with you.
My role here isn’t to do your taxes. But it is to make sure you’re asking your tax pro the right questions so you can make the smartest moves possible.
Because when you’re informed, you can steer the ship – not just react to where the tide takes you.
So, if you don’t understand exactly what this “no taxes on overtime and tips rule” covers (and what it doesn’t), no worries. That’s what I’m here to break down for you today.
How “No Taxes on Overtime” Impacts Your Kansas City Metro Business
“Success is where preparation and opportunity meet.” —Bobby Unser
Quick Answers For Business Owners: The No Taxes on Tips and No Taxes on Overtime Bill
- Tipped employees can deduct up to 25K of tip income through 2028 from federal income tax (but Social Security and Medicare taxes still apply).
- Employees can deduct the premium portion of federally required overtime pay (but not all overtime).
- Employer’s Role: You must track qualified tips and overtime separately, report them accurately on updated W-2 forms, and maintain normal withholding.
- Keep precise records, continue withholding all payroll taxes, and prepare systems for new IRS reporting requirements.
Getting payroll running smoothly in your business is no small thing (it’s a big reason why my Olathe team and I do what we do).
And the recently passed no taxes on tips and no taxes on overtime bill (more fondly known as the One Big Beautiful Bill Act) means some pretty sizable changes for your payroll process.
Now, don’t hear what I’m not saying: This isn’t a get-out-of-taxes free card. You, as a business owner, need to start prepping now to stay compliant.
And as with almost everything tax-related in your business, setting things up correctly early on will save you from having to clean up messes later.
Breaking Down the Provision
Let’s cut to the technical guts of the no taxes on tips and no taxes on overtime bill. It’s a federal income tax deduction.
Meaning, employees can reduce their taxable income when filing their annual return. It does not eliminate other payroll taxes (like Social Security or Medicare). And state and local income taxes still apply.
The OBBBA’s tip provision allows qualifying employees to deduct up to 25K in tip income per year (2025–2028). And it only applies to voluntary tips (cash, debit, credit) and excludes mandatory service charges.
To qualify, the employee must:
- Work in a tipped occupation defined by the IRS
- Report tips to you monthly
- Have a valid Social Security number (as must their spouse if filing jointly)
The deduction phases out for individuals earning above 150K or joint filers above 300K.
Overtime works differently. Employees can only deduct the premium portion (AKA, the extra half-time rate) of federally mandated overtime pay under the Fair Labor Standards Act (FLSA). That means state-specific or contractual double-time arrangements might not qualify.
Let’s say, as an example, one of your employees makes 20 dollars an hour. She works 100 overtime hours in a year, and her overtime rate is 30 dollars an hour (time and a half).
That makes her total overtime pay 3K: her regular pay being 2K and her premium overtime pay 1K (the extra 10 dollars an hour times 100 hours).
Which means she can deduct 1K from her federal taxable income when filing her 2025 return in the spring. Note that this doesn’t change her paycheck or your payroll deposits. You still withhold taxes on all 3K. The benefit hits later, at filing time.
Qualifying for the Deduction
This is where it gets nitty-gritty:
- Tips: Must be voluntary, reported to you monthly (and over 20 dollars), and recorded properly. Mandatory service charges or “gratuity fees” aren’t tips.
- Occupations: IRS will release the official qualifying list by October 2nd (servers, bartenders, delivery drivers, stylists likely included; lawyers and accountants definitely excluded).
- Overtime: Only federal FLSA overtime counts. State laws or employer agreements that pay “double time” don’t automatically qualify for deduction.
- Social Security Numbers: Employees (and spouses on joint returns) must have valid SSNs to claim.
Your Role as Employer
This law doesn’t change your withholding practices. So don’t stop federal income tax withholding on these wages. But it does add new reporting obligations. You’ll need to:
- Track and categorize qualified tip income and FLSA overtime premium pay separately. Make complete records going back to January 1, 2025.
- Be prepared to provide your employees with their individual records of these items since the W-2 form for 2025 is not changing.
- Retain detailed tip reports and overtime logs in case of IRS audits.
And your employees will probably have questions about why their paychecks look the same, even though they’re hearing about tax breaks. You’ll want clear documentation and pay stubs showing their overtime details and reported tips to help them understand and claim their deduction during tax season.
Last week, the IRS has announced a phased implementation, which means some of the changes we’ve discussed won’t take effect for Tax Year 2025.
The key takeaways from the IRS’s announcement:
- No new forms for now. Forms W-2, Forms 1099, and Form 941 will not be changed for Tax Year 2025. Keep using the current versions of these forms and existing procedures.
- Withholding remains the same. The federal income tax withholding tables won’t be updated for the new law in 2025. This means you will continue to withhold federal taxes on tips and overtime pay as you always have.
- The prep work is still vital. The IRS is actively working on new guidance, updated forms, and a plan for how to report tips and overtime for future tax years, starting with Tax Year 2026. You should have a talk with your payroll provider, accountant, and tax professional to make sure your systems can accurately track and report these new categories of income (even if you won’t report them just yet).
FAQ
“Which occupations qualify for the tip deduction?”
The IRS will issue a list soon (by October 2nd at the latest), but expect servers, bartenders, delivery drivers, and similar roles to qualify. Professional services like law and accounting will be excluded.
“Will my payroll costs change because of this?”
Your direct payroll costs for Tax Year 2025 will not change. There will be no changes to withholding tables or payroll return forms for 2025. The new administrative or software costs you might incur to ensure compliance will be for future tax years, as the IRS is working on new guidance and updated forms for Tax Year 2026.
“Do I need to change how I pay my employees right now?”
No. You should continue using your current procedures for reporting and withholding for Tax Year 2025. The new reporting requirements will not take effect until Tax Year 2026.
“Should I start separating qualifying and non-qualifying tips/overtime in my payroll now?”
Yes, if your system can handle it. The sooner you start tracking these categories, the easier it will be to transition to the new reporting requirements in Tax Year 2026.
“What about independent contractors receiving tips?”
They’re included, if in a qualifying occupation. They’ll claim the deduction on Schedule C, subject to the same 25K annual cap and AGI phaseouts.
“What if I operate in multiple states?”
Keep in mind that this is a federal deduction. Most states haven’t adopted it yet. You’ll still need to follow state-specific payroll rules, which could mean more complexity in reporting.
“What do I tell employees who hear about this and expect bigger paychecks?”
You can now confidently tell your employees that the IRS has confirmed there will be no changes to their paychecks or your withholding practices for 2025. You can explain that the tax benefit is a deduction they can claim when they file their annual tax return, but it doesn’t affect their regular pay.
What this really means for you
This is the moment to loop in both sides of your advisory team:
- Talk to your tax pro about the exact payroll and reporting changes you’ll need to make for compliance.
- Talk to me about strategy: how this fits into your growth plans, cash flow management, and long-term operational efficiency.
Because, yes, compliance keeps you out of trouble. But strategy is what helps you turn new rules into advantages:
calendly.com/betsyteegardin
And keep an eye out for my next email next week. We’ll dig into what this provision really means for your business at the big-picture strategy level and how you can position yourself to benefit from it.