The One Big Beautiful Bill Act of 2025 (OBBBA) has introduced two major payroll provisions that are making headlines: No Tax on Tips and No Tax on Overtime. Business owners, employees, and payroll managers alike are asking the same questions: When does no tax on overtime start? Do tips really go untaxed in 2025? Who qualifies for these new breaks, and what rules still apply?
At Alloy Silverstein, our CPAs are working closely with clients to clarify the new overtime tax law and tip reporting rules, helping both employers and employees prepare. Here’s what you need to know about these tax changes—and what remains uncertain until further IRS guidance is released.
Regarding overtime, the tax bill uses the Department of Labor’s definition of working beyond 40 hours in a single workweek for non-exempt employees. The deduction only applies to the overtime portion of the pay (the one-half of time-and-a-half). But there’s still some gray areas. For example, what happens if a worker is compensated via a bonus or comp time instead of an hourly wage?
In September 2025, the U.S. Department of the Treasury and the IRS released proposed regulations under the One Big Beautiful Bill Act (OBBBA) clarifying which occupations “customarily and regularly receive tips” and defining what qualifies as a “qualified tip” eligible for the new federal income-tax deduction.
The guidance identifies nearly 70 occupations across eight categories—from bartenders and servers to home service workers and transportation operators—and assigns each a Treasury Tipped Occupation Code. To qualify, the tip must be voluntary, paid by a customer, and given in cash or a cash equivalent (such as a card, check, or payment app), including tips shared through a tip pool. Mandatory service charges (like automatic gratuities for large parties) and tips linked to illegal activities are not considered qualified tips.
Employers are required to separately report qualified tips and qualified overtime on an employee’s Form W-2 or a contractor’s Form 1099. The problem is that 1099s do not currently have a spot to report tips (the W-2 currently has a box for allocated tips), while both W-2s and 1099s don’t have a spot to report overtime.
There’s also withholding questions. While there’s a tax break for tips and overtime up to a certain dollar amount, this only applies to federal income taxes. Tips and overtime are still subject to other taxes, including Social Security, Medicare, and state income taxes. Employers will have to distinguish between income that’s fully taxable, and income that’s only subject to Social Security, Medicare, and other taxes.
The IRS has confirmed that 2025 will serve as a full transition year for implementing the “No Tax on Tips” and “No Tax on Overtime” provisions under the One Big Beautiful Bill Act (OBBBA). Employers will not be required to use revised W-2 or 1099 forms until tax year 2026, and the agency has granted broad relief allowing businesses to use any reasonable method to track and report qualified tip and overtime income during 2025. This means employers may rely on existing payroll systems and internal records while preparing for the updated reporting formats scheduled for release next year.
The IRS also clarified that workers may still claim the deductions on their 2025 tax returns as long as they maintain adequate records of qualified tip and overtime amounts. To prepare, employees should:
Compile and track their tip and overtime income for all of 2025.
Retain pay stubs, time sheets, and any employer statements showing separate tracking of these amounts.
Confirm with employers how these categories are being documented for year-end reporting.
Additional IRS guidance, covering documentation standards and the finalized list of qualifying tipped occupations, is expected by late 2025, well before 2025 tax filings begin in early 2026.
While the OBBBA’s “No Tax on Tips” and “No Tax on Overtime” provisions are headline-making, the details are still developing.
At Alloy Silverstein, we’re closely monitoring these changes to provide timely, practical guidance for both employers and employees. Visit our Tax Reform Resource Center for the latest updates, or contact our CPAs today to discuss how the OBBBA impacts your payroll, compliance, and tax planning strategy.
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