Takeaways

• Employers will need to update payroll and reporting systems to meet OBBBA’s new requirements for reporting employees’ tips and overtime earnings.
• The temporary tax deductions for tips and overtime provide opportunities to restructure compensation policies to maximize employees’ nontaxed income.
• Until IRS regulations and guidance flesh out further details of what the new law requires and allows, deductions on tips and overtime earnings are uncharted territory — employers should consult with counsel before undertaking drastic changes to established pay practices.

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The 2025 federal budget law, the “One Big Beautiful Bill Act” (OBBBA), contains numerous provisions that directly impact employers. (See Federal OBBBA Round-Up: What Employers Need to Know Now.) Among these provisions are temporary tax deductions on tipped earnings and overtime pay. Both deductions are set to expire after the 2028 tax year. The law imposes additional requirements on reporting of workers’ tipped and overtime earnings. The new deductions may present opportunities to restructure compensation policies to maximize employees’ nontaxed income.

Here, we recap the key features of the tax deductions for tips and overtime pay, what they mean for employers, and the questions that remain as we await regulatory guidance.

Tax Deduction on Overtime Premium

The OBBBA creates a limited deduction for overtime pay premiums required by the Fair Labor Standards Act (FLSA). Premium pay is...

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