On , the One Big Beautiful Bill Act (“OBBBA”), Public Law No. 119-21, was signed into law. While the OBBBA covers a wide range of provisions, two notable sections immediately impact those engaged in certain businesses that receive tips. Those key sections—“No Tax on Tips” (Sec. 70201) and “No Tax on Overtime” (Sec. 70202)—are effective for tax years 2025 through 2028.
“No Tax on Tips” (Sec. 70201)
Despite its title, this section doesn’t provide a wholesale exclusion of taxes on tips. Rather, it provides a limited deduction from taxable income.
- Who qualifies? Employees or those who are self-employed in occupations the IRS determines to be “customarily and regularly” tipped as of December 31, 2024. By October 2, 2025 (90 days after enactment of the OBBBA), the Secretary of the Treasury or its delegate will publish a list of qualifying occupations.
- Deductible amount: Up to $25,000 annually, which phases out when the taxpayer’s adjusted gross income exceeds $150,000 (or $300,000 if filing jointly).
- Eligible tips: Voluntary cash, charged tips, or tip-sharing amounts reported on a Form W-2, 1099, or other applicable form.
- Exclusions: Certain individuals working in Specified Service Trades or Businesses (“SSTBs”) as defined in the IRS Code; although none appear to be in traditional tipping settings, such as restaurants or hotels.
“No Tax on Overtime” (Sec. 70202)
Well, not really “no tax,” but a newly available tax deduction. The OBBBA provides that individuals may deduct the “premium” portion of Fair Labor Standards Act (“FLSA”)-required overtime pay. Keep in mind that the FLSA is a federal law and it only requires the payment of weekly overtime. In California, however, employers must also follow daily overtime requirements, which means employers must find a way to distinguish the two for tracking tax withholding and reporting.
- Who qualifies? Employees receiving FLSA (weekly) overtime pay reported on Form W-2, 1099, or other applicable form.
- Deductible amount: Up to $12,500 annually ($25,000 for joint filers), which phases out when the taxpayer’s adjusted gross income exceeds $150,000 (or $300,000 if filing jointly).
- Eligible overtime: The portion of pay above the employee’s regular rate (i.e., the “½” in “time-and-a-half”). Again, the OBBBA only references FLSA (weekly) overtime and not California daily or weekly overtime pay.
Next Steps for Employers
To comply with the OBBBA, employers should promptly:
- Review Payroll Systems: Review and update systems to ensure separate tracking of qualified tips and the FLSA (weekly) “premium” portion of overtime compensation to ensure that only state tax withholding is applied to overtime.
- Coordinate with Vendors and Experts: Work with payroll providers, accountants, tax professionals, and legal counsel to ensure proper systems are in place for compliant tracking and reporting.
- Update Policies and Procedures: Review and update tip reporting practices, overtime calculations, and payroll practices to ensure compliance with the OBBBA.
- Train Managers and Staff: Equip managers, HR, and payroll teams to address employee questions without giving tax advice. Qualified personnel should be able to explain what the company will report and direct employees to their own tax professionals for personal guidance.
- Watch for IRS Clarifications and Guidance: Stay alert for the list of qualifying tipped occupations (expected October 2025), technical reporting instructions, and additional guidance.
Transition Period and Potential Penalties
The OBBBA provides some allowance for approximation for the tax year 2025. It is unclear exactly what will be deemed acceptable to the IRS.
Failure to comply with the tip-related portion of the OBBBA may expose employers to reporting penalties and employee disputes over eligibility. Employers should work quickly with their payroll providers and tax advisors to reasonably account for 2025 so far and to update their systems and procedures going forward.
Proactive planning now will help employers avoid reporting errors and potential penalties when the first filings are due, and to address tips or overtime already taxed earlier in 2025.
For questions regarding the above or any other employment law issues, contact the attorneys at LightGabler LLP.