Overtime pay
Hlavac explained that the no taxes on overtime provision in the recently passed One Big, Beautiful Bill is limited. Not all overtime payments are excluded from taxes. The bill provides a deduction of up to $12,500 ($25,000 for married couples filing jointly) for qualified overtime compensation received during the year. The deduction phases out with a modified adjusted gross income of $150,000 ($300,000 for joint returns).
Only the pay differential (the difference in pay rate between regular hours and overtime hours) is excluded from being taxed. For example, if an employee is normally paid $20 per hour but earns $30 per hour during overtime, only the incremental $10 per hour qualifies for the new exclusion.
Hlavac also noted that in the case where the overtime rate is higher than 150% of an employee’s usual per hour pay the amount above the 150% is not eligible for the tax break. Similarly, shift differential payments or payments exceeding the federal overtime rate for working on a holiday do not qualify. Under the One Big, Beautiful Bill overtime is defined in conjunction with the Fair Labor Standards Act, meaning compensation for hours worked over 40 in a work week, not for hours worked over eight in a day.
The One Big, Beautiful Bill requires employers to record and track the total amount of qualified overtime compensation received by employees annually. Employers must report qualified overtime compensation on an employee’s W-2 at the end of each calendar year. Since there is currently no place on the W-2 form to report this information, the IRS is expected to issue a new W-2 form later this year.
Under a transition rule for 2025, employers may approximate the amount of qualified overtime compensation on employees’ W-2s using “any reasonable method specified” by the IRS. Employers will need to stay updated on IRS guidance in this regard.
The overtime exclusion is effective only for tax years 2025 through 2028. Additionally, the qualified overtime compensation excluded from federal income tax will still be subject to other federal payroll taxes (i.e., Social Security and Medicare), as well as state and local income tax.
Taxes on tips
According to the One Big, Beautiful Bill, workers who “customarily receive tips” can exclude up to $25,000 in tips from their taxed wages for federal income tax purposes. The IRS is expected to issued guidance prior to October 2025 with respect to what occupations “customarily receive tips,” but it is expected that this will include wait staff in restaurants and bars, valets, hair stylists, bartenders, nail technicians, etc. As with qualified overtime compensation, the income excluded for federal income tax purposes will still be subject to Social Security and Medicare taxes, as well as applicable state and local income taxes.
Employers must ensure they are not misclassifying regular wages as a tip income. For example, a new trend for retailers has been to add a tip jar to their counters. While these random tip jars are unlikely to fall within the bill’s tax exclusion, Hlavac recommends employers uncertain about how guidelines apply to their employees should seek legal counsel.
Notwithstanding the new exclusion, tipped workers will still receive their regular paychecks with standard tax withholdings. The tax break on tips takes effect once the worker files their tax returns the following year. This means tipped workers will not see the tax relief until they file their 2025 tax return in 2026. The tax exclusion related to tips is scheduled to end on Dec. 31, 2028.
Sarah Coveney, a president of PremierNow, a national payroll service said employees are not going to feel the tax benefit in their regular paychecks. They are going to receive the tax benefit when they file their personal tax returns. It will be important for employees to have access and review their pay stubs and W-2 forms so they can record the pertinent details related to overtime and tips. There is still more guidance to be coming as the IRS website details – www.irs.gov/newsroom/one-big-beautiful-bill-act-tax-deductions-for-working-americans-and-seniors.
Hlavac noted that complexities are common with any new laws regarding compensation and benefits. This is nothing new for payroll departments and employers. At myHR Partner, we recommend that our clients clearly communicate the details of the new benefit to employees before implementing the new requirements, as these changes can be confusing.
Most companies must rely on their payroll service to track this information. Hlavac recommends businesses work with trusted and established payroll companies to ensure they understand the changes and track things correctly.
Stay tuned as we navigate these changes and the new expected W-2 is released later this year.
This article was originally posted on The Morning Call on August 10, 2025. Tina Hamilton is an Entrepreneurs' Organization (EO) member in Philadelphia, and is the founder and CEO of myHR Partner.
