Information Regarding Overtime Compensation and Deductions Detailed in a Single Law Proposition
The recently signed One Big Beautiful Bill (OBBBA) includes provisions that offer deductions for qualified tips and overtime pay from federal taxable income for tax years 2025 through 2028.
**Qualified Tips and Overtime Deductions**
The deductions, found on Form 1040, Line 11, are subtracted from Adjusted Gross Income (AGI) to arrive at taxable income. These deductions, known as above-the-line deductions, directly reduce taxable income.
The deduction for tips is capped at $25,000 per year, while the deduction for overtime pay is limited to $12,500 per year, or $25,000 if filing a joint return.
**Income Phaseouts**
Both deductions are phased out for taxpayers with modified adjusted gross income exceeding $150,000 for single filers or $300,000 for joint filers.
**Qualification of Overtime Pay**
Only overtime compensation paid as required under section 7 of the Fair Labor Standards Act, in excess of the employee’s regular pay rate, qualifies for the deduction. Overtime pay cannot include any amount that has been treated as a qualified tip.
**Reporting and Withholding Requirements**
Employers must continue to report tips and overtime pay on Form W-2 but are now required to separately identify tips and overtime amounts for tax reporting. Tips and overtime are still subject to Social Security and Medicare taxes, so employers must withhold these employment taxes accordingly. Payroll systems may need updating to accommodate new withholding tables and track qualified overtime and tips correctly.
These provisions were part of the bill sections 70201 and 70202 and largely reflect both House and Senate versions of the final legislation, aiming to ease tax burdens on working families by allowing deductions for these income components while maintaining payroll tax collections.
It is important to note that these deductions do not apply to tips received in fields such as health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset is the reputation or skill of employees.
The "tips" subject to the deduction must be received by individuals in an occupation that customarily and regularly receives tips on or before December 31, 2024. The article does not provide a way to game the tips deduction, emphasising the importance of reporting accurate income.
The overtime deduction does not seem to address the equity or sense behind the special tax treatment of overtime premiums, and it remains unclear how the Fair Labor Standards Act handles exemptions for employees not subject to the overtime premium requirement.
In conclusion, the One Big Beautiful Bill provides a significant change in the tax landscape for tips and overtime pay, offering deductions to eligible taxpayers while maintaining payroll tax collections. It is crucial for employers and employees to understand the new reporting and withholding requirements to take full advantage of these deductions.
In the context of the One Big Beautiful Bill (OBBBA), businesses may find financial relief as the bill allows for deductions of qualified tips and overtime pay from federal taxable income from 2025 through 2028. These deductions, aimed at easing tax burdens on working families, are directly reducing taxable income and can significantly impact a business's finance section. However, it is important to thoroughly understand the new reporting and withholding requirements to reap the full benefits of these deductions.
