The "One Big Beautiful Bill" has now been signed into law. Among many other changes, this new law contains new tax provisions designed to help hourly workers keep more of the pay they earn in the 2025 tax year. However, these changes also create new responsibilities for employers. This newsletter explains what's changing and how your business can prepare:

What's Changing?

1. No Tax on Tips
Employees in tip-based roles will be allowed to reduce their federal taxable income by up to $25,000 in qualifying tips. Only certain types of tips count (cash tips, credit card tips, etc.), and they must come from jobs where tipping was common before 2025.

2. No Tax on Overtime
Employees who work overtime, meaning more than 40 hours in a workweek and are paid time and a half, will be able to deduct up to $12,500, or $25,000 for married couples filing jointly. Importantly, this deduction is only available for the overtime "premium" amount (i.e., the extra overtime dollars above the employee's normal hourly rate).

What Employers Need to Know

While employees will see tax savings, employers must adjust payroll systems and reporting practices to comply with the law. Key requirements include:

  • Reporting cash tips and overtime pay separately on W-2 forms.
  • Identifying each employee's job title or occupation, especially for tipped workers.
  • Avoiding reclassification of wages or attempts to shift normal pay into "tips" or "overtime" in ways that may violate IRS rules or other federal laws.

These changes will likely require payroll software updates, HR training, and system reviews to ensure accuracy.

What You Should Do Now

Here is how you can prepare before these rules take effect:

  • Meet with your payroll provider to ensure your systems are ready to properly classify wages earned by your hourly workers in 2025.
  • Review employee job classifications to ensure consistency with federal rules.
  • Plan clear communication to help employees understand these changes.
  • Avoid making pay changes that could appear to be manipulating income reporting.

There is no need to change how you calculate paycheck withholdings yet. Updated guidance from the IRS is expected for the 2026 tax year. However, employers must begin collecting and reporting tip and overtime information accurately as of January 1, 2025.

Need Help?

These legal changes create new opportunities for employees and tax benefits for some businesses. But they also bring new risks if reporting is handled incorrectly. Preparing now can help you avoid penalties and give your team a head start on compliance.

If you need help updating your policies or making sure tips and other wages are being handled correctly, please give us a call. Our team would love to assist your business!