The One Big Beautiful Bill Act (OBBBA) contains provisions for both of these issues. We’ve received numerous calls in reference to them, so I thought I’d separate some fact from fiction.
No Tax On Overtime
1 – This allows Eligible Workers to deduct from their Federal Taxes qualified overtime income from 2025 – 2028.
2 – Social Security and Medicare Taxes must still be withheld and paid on qualified overtime.
3 – This only applies to overtime reported on a W-2.
4 – Managers who aren’t paid for their overtime, do not qualify for this income exclusion.
5 – The deduction is capped at $12,500 for single filers and $25,000 for joint filers and phased out by $100 for each $1000 by which the taxpayer’s modified adjusted gross income exceeds $150,000 for a single taxpayer and $300,000 on a joint return.
6 – Income Tax Withholding at both the Federal and State Levels will be required in case the worker exceeds the income limit or if the state eliminates the deduction at the state level.
No Tax On Tips
1 – This allows Eligible Workers to deduct from their Federal Taxes qualified tips paid by cash or credit card from 2025 – 2028.
2 – Social Security and Medicare Taxes must still be withheld and paid on qualified tip income.
3 – This only applies to tips reported on a W-2.
4 – Managers who share in tip income qualify for this income exclusion.
5 – The deduction is capped at $25,000 and phased out by $100 for each $1000 by which the taxpayer’s modified adjusted gross income exceeds $150,000 for a single taxpayer or $300,000 on a joint return.
6 – Income Tax Withholding at both the Federal and State Levels will be required in case the worker exceeds the income limit or if the state eliminates this deduction at the state level.
Let me leave you with this…
These two tax law changes are going to start a s**t storm. Once you think some of this through, you’re going to need to be ready for the following.
1 – Your managers who aren’t paid for overtime are going to want access to this deduction. Many of you made some of your people managers specifically so that you wouldn’t have to pay them time and a half in the first place.
When they come to you and start grumbling, what are you going to say? They’re going to have a legitimate beef.
2 – If your manual payroll system doesn’t keep track of overtime, you better see that it does and audit through the first part of this year to pick it up.
3 – Restaurant and bar operations that don’t keep track of tip income will have significant difficulties. I can’t tell you how many operations I’ve seen over the years that just distribute cash tips and don’t put them on a W-2.
What will you do if half of your servers or managers want to take advantage of this deduction, and the other half don’t? It could turn into World War III.
4 – Absolutely no one is going to want income taxes withheld on either overtime or tip income whether they’re over or under the income limitations. Given the fact that the states are broke, they’re all probably going to pass laws saying that these workers still need to pay income tax at the state level.
Your workers are going to assume that it’s completely tax free. Imagine that fight.
The sooner you understand these basics and have contingency plans and answers in place, the better off you’ll be. When you have questions, you know the number.
Enjoy the weekend.
We’re all going to get through this. Let’s get through it together.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
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