28 Aug Overtime & Tips: New Tax Breaks That Could Save Workers Thousands. If Payroll Gets It Right.
Posted at 16:04h
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The recently passed One Big Beautiful Bill brought a wave of tax changes, but two stand out for employees in hospitality, retail, and other hourly-wage industries:
- No Tax on Tips Deduction: Up to $25,000 deductible for tips (income tax only, not payroll taxes).
- Overtime Deduction: Up to $25,000 deductible for overtime income, with income caps.
Both could put real money back in employees’ pockets, but only if their payroll is set up correctly.
What the Law Says:
- These deductions are income tax deductions, payroll taxes (FICA) still apply.
- Both require precise categorization of wages in payroll records.
- Incorrect W-2 reporting could cause employees to lose the benefit or trigger IRS corrections.
Why Payroll Accuracy Matters More Than Ever:
Most payroll mistakes aren’t intentional, they happen when overtime or tips get lumped into “regular wages” or coded incorrectly. Under the new rules, the IRS will be watching those codes closely.
Action Steps for Employers:
- Review Payroll Categories – Make sure overtime and tips have their own codes in your payroll software.
- Check Your W-2 Mapping – Ensure those categories flow into the correct W-2 boxes.
- Educate Your Team – Let employees know about the deductions and the importance of reporting tips accurately.
Have questions? Need help checking your payroll setup? Contact us. We’ll help you get it right.