We wanted to share a quick update on two new federal tax changes that affect restaurant businesses — especially those with tipped or hourly staff.
Key Changes from the 2025 Tax Law
The One Big Beautiful Bill Act, signed in July 2025, introduced two new deductions aimed at supporting working Americans:
- “No Tax on Tips”
- “No Tax on Overtime”
Both provisions apply starting January 1, 2025 and are currently scheduled to last through 2028.
1. “No Tax on Tips” – For Employees Who Regularly Receive Tips
- Employees in occupations that “customarily and regularly” receive tips can deduct up to $25,000 of qualified tip income each year from their federal taxable income.
- The deduction begins to phase out at $150,000 of income for single filers ($300,000 for joint).
- It applies only to voluntary tips from customers — not mandatory service charges or automatic gratuities.
- Payroll taxes (Social Security and Medicare) still apply — the deduction only affects federal income tax.
2. “No Tax on Overtime” – For Hourly and Non-Exempt Workers
- Employees can deduct the federal income tax on up to $12,000 of overtime pay each year (or up to $6,000 for single filers).
- The deduction applies to overtime hours worked over 40 per week that are paid at a rate of at least 1.5× the regular wage.
- It also phases out for higher-income earners (same thresholds as above).
- Employers must still withhold payroll taxes on overtime pay; the deduction is claimed later by the employee when filing their return.
What This Means for Your Business
- Continue current payroll practices. These deductions are claimed by employees when they file taxes — employers should keep withholding and reporting as usual for 2025.
- Track tips and overtime clearly. Distinguish voluntary tips from service charges, and ensure overtime pay is coded separately in your payroll system.
- Educate your team. Let staff know they may receive new deductions on their 2025 tax returns, but their paychecks and payroll taxes won’t change right now.
- Watch for IRS guidance. Updated W-2 reporting codes and instructions are expected for the 2026 filing season.
Next Steps
- Review how your payroll system records tips and overtime.
- Share this update with your managers and payroll staff.
- Keep an eye out for further IRS clarification — We’ll notify you when it’s released.
- Contact us if you’d like a quick review of your current payroll setup or tip-tracking process.
Thank you for your continued partnership. We’ll keep you updated as the IRS releases more details to help you stay compliant and take full advantage of these changes.
If you have any questions, please get in touch with us.
