The One Big Beautiful Bill Act (OBBBA) introduces new federal tax deductions aimed at workers who earn tips or overtime.

These deductions could be good news for service workers and hourly employees, but they may not work the way people expect. Here’s a quick breakdown of what’s changing, when it starts, and what your team needs to know.

No Federal Income Tax on Tips? Not Quite.

Starting in 2025, employees who receive tips as part of their income may be eligible for a federal income tax deduction of up to $25,000 for reported tip income.

But there are a few key points to understand:

• This is a deduction, not a tax exclusion. That means tips still need to be reported and will continue to be subject to Social Security, Medicare, and other payroll taxes.
• The deduction is claimed on the employee’s individual tax return, not through payroll.
• It only applies to voluntary tips, not mandatory service charges or other fees labeled differently.
• The deduction phases out for high-income earners (those making over $150,000 individually or $300,000 jointly)
• Deduction applies for tax years 2025-2028

So while “No Tax on Tips” may reduce total tax liability at tax filing time, it doesn’t increase take-home pay in the moment.

Overtime Deduction: Same Concept, Different Numbers

Similarly, OBBBA includes a new above-the-line deduction for qualified overtime wages:

• Capped at $12,500 per individual (or $25,000 for joint filers)
• Available for overtime wages paid under the Fair Labor Standards Act
• Still subject to all regular payroll taxes
• Deduction also applies for tax years 2025 through 2028
• Also subject to income-based phaseouts (MAGI exceeding $150,000 or $300,000 when filing jointly)

Again, this is not a change to how overtime is calculated or taxed in payroll, and employees won’t see an immediate difference on their pay stub. Instead, if they qualify, they may see a smaller federal tax bill when filing their return.

How This Impacts Payroll and Reporting

While these deductions live on the individual side of tax filing, they do affect payroll teams.

• A new Form W-2 is expected, with additional boxes for reporting tips and overtime wages separately.
• Not all payroll systems track these items in a way that supports the new requirements—if you process payroll internally or through another provider, be sure to confirm system readiness.
  • Current client? Don’t worry! Wegner CPAs’ Payroll Services are already equipped to track both tips and OT.

Bottom Line for Employers

These new deductions could be a welcome benefit for your team members, especially those in hospitality, retail, beauty, and other industries with variable pay. But the benefits aren’t immediate, and they depend on accurate reporting. If your employees are asking whether they’ll see a bigger paycheck as a result of these changes, the answer is no. But with good records and some tax-time planning, they may see a smaller federal tax bill in 2026. Read more about the new tax provisions included in OBBBA that will impact business owners.

Have questions about how these provisions affect your business or your team? Reach out to your Wegner CPAs Advisor for more information.