Upcoming Changes to Tip and Overtime Income Tax and Reporting

In July 2025, H.R.1, The One, Big, Beautiful Bill Act was signed into law. This Act provides deductions for tips and overtime compensation for 2025 through 2028. As a result, employers must implement additional tracking mechanisms, so that this information is accurately reported on employees’ Form W-2.

Tip Income

Individuals are now eligible to deduct qualified tips received in occupations that customarily and regularly received tips on or before December 31, 2024. This includes individuals working in Beverage & Food Service, Entertainment & Events, Hospitality & Guest Services, Home Service, Personal Service, Personal Appearance & Wellness, Recreation & Instruction as well as the Transportation & Delivery industries. A complete list of qualifying occupations is listed on the US Treasury’s website. https://home.treasury.gov/system/files/136/Tipped-Occupations-Detailed-8-27-2025.pdf

“Qualified tips” are voluntary cash or charged tips received from customers or through tip sharing. The maximum annual deduction for tip income is $25,000. For self-employed individuals, this deduction may not exceed the person’s net income from the trade or business in which the tips were earned.

Overtime Compensation

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 reported on a Form W-2, Form 1099, or other specified statement furnished to the individual. The maximum annual deduction for overtime compensation is $12,500 ($25,000 for joint filers).

Reporting

Both federal deductions are available for itemizing and non-itemizing taxpayers. However, these deductions phase out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers). If individuals are married, they are required to file jointly to claim these deductions.

For the 2025 tax year, employers can use “any reasonable method” to approximate qualified tip and overtime amounts for 2025 tax filings. Employers and other payors are required to file information returns with the IRS and furnish statements to taxpayers showing the cash tips received and the occupation of the tip recipient as well as the total amount of qualified overtime compensation paid during the year.

Starting in 2026, employers must begin tracking tips and overtime compensation, which will be reported on the updated Form W-2. Additionally, the IRS will adjust its income tax withholding rules as well as the Form W-4 to account for these new deductions.

If your business needs assistance implementing these changes or with any other accounting activities, you have access to experienced financial leadership, tailored support, and strategic advice. If you would like to know more about how R&A can help your business, give us a call. We are here to help.