One Big Beautiful Bill: Changes to the Tax Treatment of Overtime and Tips

The One Big Beautiful Bill is a significant piece of legislation that includes important changes to the Federal tax treatment of qualified tips and qualified overtime compensation. Employers would be well served to understand what impact these changes have on their employees, if any.

No Federal Taxes on Tips

Effective for 2025 through 2028, employees and self-employed individuals may deduct “qualified tips” received in occupations that are listed by the IRS as customarily and regularly receiving tips on or before December 31, 2024, and that are reported on a Form W-2, Form 1099, or other specified statements furnished to the individual or reported directly by the individual.

• Qualified tips are voluntary cash or charged tips received from customers or through tip sharing in an occupation which customarily and regularly received tips. The Secretary of the Treasury (“Secretary”) is to provide a list of occupations which customarily and regularly receive tips.
  • To be a qualified tip the amount received by an individual must:
    • be paid voluntarily with no consequences for nonpayment,
    • not be subject to negotiation, and
    • be determined by the payor.
• Tips do not qualify for the deduction if they were provided for:
  • the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or
  • any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees, or
  • investing and investment management, trading, or dealing in securities, partnership interests, or commodities.
• The maximum annual deduction is $25,000; for self-employed individuals, the deduction may not exceed net income (without regard to this deduction) from the trade or business in which the tips were earned.
  • The deduction is permitted for taxpayers who do not otherwise itemize their tax deductions.
• The deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).
• Qualified tips continue to be subject to payroll taxes like Medicare and Social Security.
• For 2025, employers are required to include the approximate amount of cash tips on any Form W-2 or Form 1099 by any reasonable method specified by the Secretary.

No Federal Taxes on Overtime

Effective for 2025 through 2028, individuals who receive qualified overtime compensation may deduct the pay that exceeds their regular rate of pay – such as the “half” portion of “time-and-a-half” compensation — that is required by the Fair Labor Standards Act (FLSA) and that is reported on a Form W-2, Form 1099, or other specified statement furnished to the individual. Individuals exempt from the overtime requirements of the FLSA are not impacted by this change.

• The maximum annual deduction is $12,500 ($25,000 for joint filers).
  • The deduction is permitted for taxpayers who do not otherwise itemize their tax deductions.
• The deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).
• Qualified overtime compensation continues to be subject to payroll taxes like Medicare and Social Security.
• For 2025, employers are required to include the approximate amount of qualified overtime compensation on any Form W-2 or Form 1099 by any reasonable method specified by the Secretary.

Looking Ahead

Although the fee schedule is not yet in effect, employers, insurers, and claims administrators should begin preparing for its implementation: 

• Review and update internal procedures to ensure compliance with the 60/90-day payment timelines. 
• Track the DWD’s rulemaking and updates related to extension requests and implementation mechanisms. 
• Review medical provider networks to identify which facilities qualify as hospitals under the statutory definitions and will be subject to the fee schedule for workers’ compensation claims.