The One Big Beautiful Bill Act (OBBBA) introduces new income tax deductions for tips and for the premium portion of overtime, effective for tax years 2025–2028. However, the IRS has confirmed that businesses and payroll providers can continue using existing reporting and withholding procedures throughout 2025, with no immediate changes required for OBBBA compliance.
That means now is the time to start planning. Employers should use the remainder of 2025 to assess systems, train staff, and prepare for a smooth transition.
Changes to Tax on Tips and Overtime at a Glance
The OBBBA provisions impacting tax on tips and overtime are as follows:
- No tax on tips: For tax years 2025–2028, employees and certain self-employed individuals may deduct qualified tips (voluntary cash/charged tips and tip-sharing amounts) up to $25,000.
- By Oct. 2, 2025, the IRS will publish a list of occupations that “customarily and regularly” received tips on or before Dec. 31, 2024.
- Employers/payors must furnish specified statements and information returns.
- No tax on overtime: For tax years 2025–2028, individuals may deduct the premium portion of qualified overtime (the amount above the regular rate required by the Fair Labor Standards Act — up to $12,500 ($25,000 for joint filers).
- Employers/payors must report total qualified overtime paid on information returns.
It’s important to note that these are income tax deductions, not an immediate exclusion from wages for withholding purposes. Both deductions phase out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).
Business As Usual Through 2025
The IRS has confirmed that payroll operations remain business as usual through 2025. Key areas of stability include:
- Payroll forms: Forms W-2, 1099, and 941 will keep their current structure and requirements for tax year 2025.
- Withholding tables: Federal income tax withholding tables are unchanged for 2025.
- Reporting procedures: Employers should continue to follow established processes for reporting tips, calculating overtime, and filing taxes.
How Employers Can Start Preparing Now
Although no compliance-related changes are required of employers this year, organizations should begin to prepare for future modifications.
- Start Internal Discussion
Bring together payroll, HR, accounting, and leadership teams to map operational impacts for tipped and overtime populations. - Assess Payroll Systems
Evaluate whether current payroll software and providers can track and separately report qualified tips and qualified overtime for 2026 forms. - Build Training Plans
Develop training plans to help teams understand which amounts qualify, such as overtime premium versus total overtime, and how to document them. - Monitor IRS Updates
Monitor IRS updates, including the occupation list for tipped work, transition relief details, and 2026 form changes.
Industry-Specific Considerations
The impact of no tax on tips and overtime provisions will vary by industry, and preparation should be tailored accordingly:
- Service industries with tipped employees: Restaurants, hospitality-based organizations, and other businesses with tip-dependent workforces should assess how the new deductions will affect compensation structures and point-of-sale systems.
- Organizations with significant overtime: Manufacturing firms, healthcare companies, and businesses operating in similar industries should evaluate current overtime tracking systems to help ensure smooth reporting in 2026.
Get Ahead of OBBBA Implications with CBIZ
The IRS’s decision to delay implementation of new tax deductions on tips and overtime offers organizations a valuable opportunity: time to prepare. By taking proactive steps in 2025, employers can assess systems, build an implementation roadmap, and train teams accordingly.
CBIZ is dedicated to helping your organization understand the unique implications of the One Big Beautiful Bill Act. Explore our dedicated resource center to access insights that impact.
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