2025 Tax Changes Explained: Overtime, Tips, and W-2 Reporting Under OBBBA
As we near the end of 2025, I want to bring your attention to important changes under the One Big Beautiful Bill Act (OBBBA), signed into law July 4, 2025, that may affect how you report tips, overtime, and overall income on your 2025 income tax returns. These changes may affect what is shown on your W-2, what deductions you can take, and how self-employed tip income should be handled. Please read the following carefully, and if you’d like help applying these changes to your situation, reach out here.
It will be the responsibility of you and your employer to make sure your overtime is calculated correctly and/or your tips are calculated correctly.
New 2025 Deductions and Reporting Rules Under OBBBA
2025 Tax Deduction for Tips (‘No Tax on Tips’ Rule)
Starting January 1, 2025, employees and self-employed persons may deduct “qualified tips” up to $25,000 per year.
There is a phase-out: the deduction begins to reduce for single taxpayers with modified adjusted gross income (MAGI) over $150,000 (joint filers over $300,000).
“Qualified tips” are tips that are voluntary (cash, charged, through tip-sharing), in occupations that “customarily and regularly” receive tips as of December 31, 2024. We have a list of occupations that qualify that we will be referencing and asking taxpayers more questions on if needed.
2025 Overtime Tax Deduction (‘No Tax on Overtime’ Rule)
Also effective for tax years 2025 through 2028, there is now a deduction for qualified overtime compensation. This means for hours over 40 in a workweek under the Fair Labor Standards Act (FLSA), the premium portion (the extra half-time portion in a time-and-one-half rate) may be deductible. For example, base is $20/hour and overtime is $30/hour, the premium portion deductible would be $10/hour. This does NOT include Holiday and Weekends.
This deduction is capped at $12,500 for individuals (or $25,000 for joint filers). The same phase-out thresholds (MAGI over $150,000 / $300,000) apply.
New Reporting and Withholding Rules
Employers are required to continue to report all wages, tips, and overtime pay (including the premium portion of overtime) on employees’ W-2s. But with the OBBBA, there are new requirements:
Employers W-2s will need to distinguish amounts of qualified tips and the occupation of the tip recipient
Employers may have to separately identify qualified overtime premium pay for reporting purposes.
For the 2025 tax year, there is some transition relief: employers can use a “reasonable method” to approximate the required amounts until updated IRS guidance and payroll software changes are fully in place.
We suggest a separate statement or letter from you or your employer for tax year 2025 stating this amount. If it’s tips, you should also include a tip code.
What Stays the Same
Tips are still subject to Social Security and Medicare taxes (FICA), even if some portion becomes deductible for income tax purposes.
Employers still must withhold federal income tax, Social Security, and Medicare on tips and overtime wages, as before.
W-2 and Record-Keeping Tips for 2025
When you receive your W-2 for 2025, expect some differences (or possibly drafts or corrections, depending on how quickly your employer updates systems). Here’s what to review carefully:
The total wages/tips/overtime amounts, as usual — you’ll still see tips reported, wages, overtime, etc.
Whether your W-2 separately shows “qualified tips” (and the occupation) and “qualified overtime” (premium portion) — this helps you claim the deductions properly.
Ensure you’ve kept accurate records of all tips received (cash, credit, tip sharing) and the overtime hours worked (regular + overtime), especially the portion of pay that is the premium over the regular rate.
How to Handle Tip Income if You’re Self-Employed
If you are self-employed and receive tips:
You may also benefit from the “no tax on tips” deduction (up to the same limits and subject to the same occupation-and‐MAGI rules).
All tip income (and business income) remains subject to self-employment tax (Social Security & Medicare portions). The deduction is for income tax, not employment taxes.
Keep good records: daily tip log, amounts, how they were received, etc., so you can properly report them on your Schedule C and any information return (e.g. if some tips are reported on a Form 1099, or if you use Form 4137 for tips not reported to a regular employer).
Tip Income should be broken out and reported separately on. bookkeeping/accounting/financials software/reports from other forms of earned income in your business.
Action Steps to Prepare Your 2025 Taxes
To ensure that you are ready, here are action items I recommend:
Collect your tip records: cash and credit/charged tips, tip sharing, etc.
Gather your time/overtime data: how many hours of overtime vs regular, the rates, premium portions.
Check with your employer(s) to see how they plan to report qualified tips and overtime on the W-2, especially whether separate boxes or codes will be used.
Prepare for your tax return: We’ll need these details to ensure deductions are claimed correctly under OBBBA.
If self-employed: make sure your bookkeeping captures tip income clearly.
If you’d like, I can send a summary sheet with examples showing how the new tips and overtime deductions work, so you can see the potential impact on your taxes. You can reach out here if you have questions or want help gathering everything you’ll need for year-end.