On July 4, 2025, President Trump signed the “One Big Beautiful Bill” (OBBB) into law, which contains two key provisions that are likely to be very popular with employees. Those provisions provide federal income tax deductions on both tips and qualified overtime compensation on tax years beginning on January 1, 2025, and ending on December 31, 2028. However, these changes also bring important new reporting and compliance responsibilities for employers, who must adjust payroll processes and tax filings accordingly.

Federal deduction on reported tips

Prior to the new law, the Internal Revenue Service (IRS) treated all tips – whether cash or non-cash – as taxable income. Tips had to be reported to employers and were subject to federal income tax as well as Social Security and Medicare taxes.

The new law maintains those basic rules but introduces a federal income tax deduction for certain tips beginning in the 2025 tax year (starting January 1, 2025). Specifically, employees who “customarily and regularly receive tips” as of December 31, 2024, may deduct up to $25,000 in tip income from their federal taxable income. The Treasury Secretary (or a delegate) is required to publish a list of qualifying tipped occupations.

This deduction phases out for higher earners–beginning at a modified adjusted gross income of $150,000 (or $300,000 for joint filers)–and is reduced by $100 for every $1,000 over that threshold. Notably, this deduction is available to all qualifying taxpayers,...

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