The One Big Beautiful Bill (“OBBB”), signed by President Trump on July 4, 2025, allows workers (subject to dollar and income limitations) to deduct, on their U.S. federal income tax return, overtime payments and tips that they receive during calendar years 2025 through 2028. Here is a summary of what these changes mean to employers.1
Rules for Tips
The OBBB limits what qualifies as a tip:
- To receive favorable tax treatment for U.S. federal income tax purposes, the tip must be paid to an individual “in an occupation which customarily and regularly received tips on or before December 31, 2024.” The Treasury Department is directed to publish, not later than October 2, 2025, a list of occupations which satisfy this condition. It remains to be seen whether this will be an exclusive list, or whether businesses will be permitted to identify other occupations that meet the standard. The following businesses are specifically excluded from eligibility: accounting, health, law, actuarial science, athletics, brokerage services, consulting, financial services, and the performing arts.
- The tip deduction is limited to “cash tips,” which the OBBB defines as “tips received from customers that are paid in cash or charged.” Presumably, Internal Revenue Service (“IRS”) guidance will clarify that this definition extends to payments using digital payment platforms. The definition also includes tips received under a tip sharing arrangement.
Recordkeeping Challenges for Overtime Pay
The OBBB...
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