The One Big Beautiful Act signed into law July 4, 2025, ushers in tax breaks for tipped employees and those who work overtime. These benefits are principally applied to the employees on their individual tax return beginning for calendar year 2025.

It is important for employers to understand that the tax withholding tables have not changed, and employers are still required to report tips on the employees’ payrolls as in the past. The only change an employer might experience regarding these new rules would be from employees that might file a new form W-4 to claim less withholding due to them receiving an income tax break on their personal taxes. Please note that the tips are still reportable for social security and Medicare tax withholding and the related company match as they were in the past.

Rule Change as it relates to “No tax on tips”:
A new individual income tax deduction of up to $25,000 is available for taxpayers who get tips. If a married couple gets tips, that amount is doubled. This benefit phases out for those who have adjusted gross income of $150,000 on a Single tax return; $300,000 for a Married Filing Joint tax return.

The applicability of this benefit is dependent upon each employee’s tax status; therefore, an employee should contact their tax preparer for planning purposes and not the employer.

No Tax on Overtime:
Employers are already required to track overtime pay and regular pay separately. The IRS will allow a new deduction of up to $12,500 per taxpayer on their respective individual tax return $25,000 on a married couple filing jointly. It is important to keep the last pay stub of the year that breaks down between overtime and regular pay to support this deduction. We expect that the IRS will have a new line on the 2025 W2 forms to report this, but that remains uncertain.

No Tax on Social Security:
The new rule allows a deduction of up to $6,000 per taxpayer ($12,000 on Married Filing Joint tax returns) for those seniors age 65 and over who receive taxable social security. This benefit phases out for those with an adjusted gross income of $75,000 ($150,000 for Married Filing Joint tax returns).

A summarization of these rules can be found at the following IRS link:
https://www.irs.gov/newsroom/one-big-beautiful-bill-act-tax-deductions-for-working-americansand-seniors

For individual income tax questions, you are advised to contact your tax specialist.