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 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:

• 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 treatment: you can capitalize and amortize R&E expenses over five years for domestic costs and 15 years for foreign costs, spreading out the tax deduction instead of allowing an immediate write-off.
• Section 163(j) limitation on business interest expense: restricts the amount of a business’s deductible interest expense to 30 percent of its adjusted taxable income.
• Section 199A deduction for pass-through businesses: allows you to deduct up to 20 percent of your qualified business income, lowering your effective tax rate.

Those are the big wins that you should be talking about right now (and I’m always available to chat: calendly.com/eco-tax-free-consultation/meeting). 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.

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 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 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.
   
• Report these amounts accurately on updated W-2 forms starting in 2025 (the IRS is revising the form to reflect these deductions).
   
• 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.

Now, I’ll get more into what that employee communication looks like in next week’s strategy note. For now, here are three moves you should focus on to stay compliant:

1. Adjust to new W-2 reporting: You’re now required to separately report on Form W-2 the amounts of “qualified tips” and “qualified overtime compensation.”
    
2. Keep paying taxes. I’ll emphasize again: Tips and overtime are still subject to Social Security and Medicare taxes. So, you still have to withhold and pay these payroll taxes just like you did before. Same with state and local income taxes.
    
3. Review and update your systems. You should have a talk with your payroll providers, accountants, and tax professionals (our door is open) to make sure your systems can accurately track and report these new categories of income.

Don’t feel like you need to memorize every detail. The most important thing is to understand your role as an employer, which we’ve summarized for you.

 

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.

“What happens if I misreport tips or overtime on a W-2?”

Both you and your employee could face penalties. Proper recordkeeping and early payroll adjustments are key to avoiding errors.

“Does this affect my ability to claim the FICA tip credit as an employer?”

No — the employer credit on Social Security taxes paid on tips remains (and now extends to beauty salons). You should continue claiming it as usual.

“Will state taxes also exclude tips and overtime from taxable income?”

Not automatically. Most states haven’t adopted this federal deduction yet, so you should assume state taxes still apply.

“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.

“Should I change my payroll systems now?”

Begin planning now but wait for final IRS guidance (expected later in 2025) before making major system changes.

 

What this really means for you

Navigating new OBBBA rules is one of those things that can quietly eat away at your valuable time as a business owner. You’ve got staff to manage. Customers to keep happy. Operations to run. 

So let us make sure your payroll systems and W-2 reporting are dialed in for this shift. Just grab a time on my schedule, and we can review your current setup, outline exactly what you’ll need to do, and help you avoid big IRS headaches later:
calendly.com/eco-tax-free-consultation/meeting