Who else is as excited as we are to talk about taxes? No one else? Just us? Well, in any case, while talking about taxes may not be the most exciting thing, having to file your taxes is also maybe not the most exciting thing. But just because it’s not exciting doesn’t make it any less important. And this importance is only multiplied for business owners who have to worry not only about their own taxes, but also taxes for their business and for their employees. This can be an overwhelming task, especially when you add in keeping track of all the different legislative and regulatory updates that happen throughout the year into the mix. And that’s not even including the fact that you’re still having to perform all of the other tasks associated with keeping your business running on top of that. To say that this can be stressful would be a bit of an understatement.
Ultimately, the stress of tax season can become overwhelming for many business owners. At Payday HCM, we’re very familiar with the stress that accompanies year-end and the ensuing tax season. We have plenty of clients each year ask us questions not only about the tax filing process, but also about what kinds of changes they can expect for this tax season as compared to the last one. These changes typically revolve around new legislation that’s been passed or any deductions that might be new to this year. And, with the announcement on November 5, 2025 that the IRS will be providing penalty relief for businesses regarding changes related to the overtime and tips tax deductions, we wanted to take this moment to go over some of those changes.
So, in this article, we’ll be covering the overtime and tips tax deductions that were introduced with the passage of the “One Big Beautiful Bill Act” in July of 2025, and what businesses need to know about them. We’ll start by covering generally what the tax deductions are and how they work before getting into the details on how they change businesses’ reporting requirements heading into this next tax year. We’ll also cover the kinds of penalties that may be associated with failure to report certain information, as well as any changes to tax forms.
In this article, you will learn:
- What Are the Overtime and Tips Tax Deductions?
- Overtime and Tips Tax Deductions Reporting Requirements
- Reporting Penalties, Forms for Overtime and Tips Tax Deductions
What Are the Overtime and Tips Tax Deductions?
First things first, we’ll go over what the overtime and tips tax deductions are, how they work, and how much you can deduct.
Overview of OBBBA Tax Deductions and Changes
The passage of the “One Big Beautiful Bill Act” on July 4, 2025, introduced two new tax deductions effective from 2025 through 2028: a “No Tax on Tips” and “No Tax on Overtime” deductions. This is in addition to new tax deductions for interest accrued on car loans, as well as an increase to the standard deduction available for those 65 and older.
The OBBBA also introduced other changes that will affect business in addition to the previously mentioned tax deductions. This includes changes to the threshold for issuing Form 1099s to vendors (increasing the threshold from $600 to $2,000), as well as changes to the bonus depreciation introduced by the Tax Cuts and Jobs Act and changes to the amortization of research and development tax credits.
OBBBA Tips Tax Deduction
Starting in 2025, employees and self-employed individuals will be able to deduct qualified tips they receive while working in occupations that “customarily and regularly” receive tips as determined by the IRS. The deduction is capped at $25,000 and phases out for individuals with incomes over $150,000 (or $300,000 for joint filers).
Qualified tips are any cash or charged tips that an individual receives either directly from a customer or through tip-sharing or pooling. The list of qualified occupations, released on September 19, 2025, includes a comprehensive list of occupations that qualify for the deduction, categorized by industry, including beverage and food service, hospitality, entertainment, and events, among others.
OBBBA Overtime Tax Deduction
The OBBBA also introduced an overtime tax deduction, effective in 2025, that functions similarly to the qualified tips tax deduction. The overtime tax deduction applies to any “qualified overtime compensation” and is capped at $12,500 for single filers ($25,000 for joint filers), and phases out for incomes over $150,000 for single filers ($300,000 for joint filers).
The key to understanding the overtime tax deduction is understanding the “qualified overtime compensation” qualifier. This means that only wages received in excess of an employee’s typical rate of pay are eligible for the deduction. For example, if an employee received time-and-a-half for overtime pay, only the taxes on the half portion of their overtime pay can be deducted.
Overtime and Tips Tax Deductions Reporting Requirements
Now that we have a good understanding of what the two deductions are, we can look at how these deductions affect your reporting requirements.
OBBBA Employer Tax Reporting Requirements
Given that the OBBBA has introduced these two new tax deductions, it has also introduced new reporting requirements for employers to ensure employees are able to take advantage of the deduction and that the proper accounting is being performed. The biggest changes affect how employers report any qualifying tips or overtime pay to their employees.
For both the overtime and tips tax deductions, the IRS requires employers to provide accounting statements to both the IRS as well as to any qualifying employees that include the amount designated as qualifying tips or qualified overtime compensation, as well as the occupation of the individual.
How Employers Can Report Overtime and Tips Tax Deduction Information
The IRS only outlines that employers file an information return that includes accounting information on any qualified tips or overtime wages that would qualify for either the overtime or tips tax deductions. Similarly, the IRS requires employers to provide separate accounting to employees regarding any qualified tips or overtime compensation.
When it comes to employers providing their employees with separate accounting statements on any qualified tips or overtime compensation, the IRS only requires that employers furnish a written statement to the employee that contains the employee's occupation and the separate accounting of qualified tips or overtime compensation. Qualified overtime compensation can be included in Box 14 of an employee’s Form W-2.
Reporting Penalties, Forms for Overtime and Tips Tax Deductions
Now that we’ve covered both what the two tax deductions are and the additional reporting requirements, we’ll cover any penalties and changes to tax forms regarding the new deductions.
Are There Reporting Penalties for the Overtime and Tips Tax Deductions?
As stated above, the IRS requires employers to furnish information statements with separate accounting for any qualified tips or overtime compensation, as well as furnish employees with separate accounting for any qualified tips or overtime compensation. Penalties will be imposed on employers who fail to provide any required reports or information.
For tax year 2025, the IRS issued a notice of penalty relief on November 5, 2025, stating that penalties will not be imposed on employers for failure to meet the reporting requirements regarding the overtime and tips tax deductions. The IRS declared the tax year 2025 as a “transition year” and noted that employers may not have the systems necessary yet to comply with the reporting requirements.
Despite this, the IRS still recommends that employers provide their employees with accounting information in regards to any qualified tips or overtime compensation so that employees are able to take advantage of the new deductions.
Will Tax Forms Change With the New Tax Deductions?
On August 7, 2025, the IRS announced that tax forms for tax year 2025 will remain unchanged to allow both themselves and businesses time to account for any reporting changes that the deductions will introduce. However, the IRS did note they are working on guidance and updated forms for tax year 2026.
Employers should also note that the tax deductions won’t introduce any changes to employees’ paychecks. These deductions are, as discussed, deductions employees will take against their gross wages when filing their personal tax return. However, employers should consider how they will note any qualifying tips or overtime compensation heading into the future.
Deduct Stress from Your Tax Filings
Who said filing your taxes had to be stressful? Well, many people have said that, actually, and, for the most part, it is unfortunately true. This stress can be especially acute for business owners, as tax filing for a business can often feel like its own full-time job. This includes not only the process of actually filing your business’s taxes, but also keeping track of any legislative or regulatory changes that have taken place throughout the year that might affect the filing process. Luckily, with the information provided in this article, you’ll have the information you need to stay on top of those changes and be able to file your taxes without the added stress.
Year-end can feel overwhelming for many businesses. For some businesses, you’re trying to attract new clients and get them implemented before the start of the new year; for others, you’re trying to take full advantage of the holiday season to draw in the holiday crowds. In both cases, you’re doing all of this while still paying attention to the various compliance and reporting requirements that also come with year-end. Having a good understanding of what your business needs to do, as well as the various employer taxes your business pays, can help ease some of the stress that year-end brings. Check out our article for an in-depth explanation of employer taxes so you can get through this year-end stress-free.
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