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The One, Big, Beautiful Bill Act, enacted July 4, 2025, creates new tax deductions for tax years 2025 through 2028 for recipients of qualified tips and qualified overtime compensation. The OBBBA amendments to the Code generally impose information reporting requirements, such as on Form W-2 or Form 1099, on the payors of qualified tips and overtime in order for the recipients of such compensation to be eligible to take the deductions. However, for tax year 2025, OBBBA includes transition relief that permits employers and payors to approximate and report qualified tips and qualified overtime by any reasonable method specified by the Secretary.

The IRS and Treasury have now provided guidance in the form of two notices – Notice 2025-62 providing penalty relief for employers and payors who do not report qualified tips or qualified overtime on information returns for 2025, and Notice 2025-69 providing guidance for taxpayers who receive overtime and tips on how to calculate the deductions for 2025 in the absence of information reporting from employers and payors.  Continue Reading IRS Issues 2025 Transition Relief and Hints at Future Tips and Overtime Information Reporting Obligations

Overview

We reported in May on the provisions in the House’s One Big Beautiful Bill addressing two of President Trump’s campaign promises – no taxation of tips and overtime.  The Senate has now passed its version of the One Big Beautiful Bill, which includes its version of these provisions in sections 70201 and 70202.  See our prior blog post here for a detailed discussion of the House provisions.  While the basic structure of the provisions are similar, there are differences in the details. 

What Stays the Same

Above-the-line deductions for qualified tips and qualified overtime

Like the House bill, the Senate bill would give certain workers an above-the-line deduction for “qualified tips” and “qualified overtime compensation” included on an information return furnished to the individual or reported on a Form 4137 (for tips) for taxable years beginning after December 31, 2024, and ending for taxable years beginning after December 31, 2028.  This means the deductions are proposed to be retroactive and proposed to apply to amounts paid even before enactment of the bill.  Making this deduction available to the worker creates reporting and withholding obligations for the service recipient, as discussed in more detail below. 

In order to be deductible as qualified overtime compensation under the Senate provision, as was true with the House provision, the payment must be overtime paid as required under section 7 of the Fair Labor Standards Act that is in excess of the regular rate (as used in that section) at which such individual is employed. Qualified overtime compensation does not include any amount treated as a qualified tip.

In order to be deductible under the Senate provision, as was the case with the House provision, qualified tips generally must be paid voluntarily to a person who works in an occupation which traditionally and customarily received tips on or before December 31, 2024. The Secretary of the Treasury is directed to provide a list of occupations that traditionally and customarily received tips in 2024 and before within 90 days of enactment. 

As was the case in the House bill, the Senate bill provides that workers in certain specified businesses are not eligible for the tip deduction.  The businesses excluded are ones providing services in accounting, health, law, actuarial science, athletics, brokerage services, consulting, financial services, or the performing arts.  In the case of tips received in the course of a trade or business (other than as an employee of an employer), the deduction is limited to gross income from the business less other deductions allocable to the business.Continue Reading Senate Passes No Tax on Tips and Overtime Provisions

While we do not often report on proposed legislation, two provisions in the bill the House Ways and Means voted out of Committee on May 14th (and which was voted out of the House Budget Committee on May 18th) are worthy of attention, as they reflect how two of President Trump’s campaign promises are beginning to take shape. Sections 110101 and 110102 of the Ways and Means Committee’s “One, Big, Beautiful Bill” would give certain workers an above-the-line deduction for “qualified tips” and “qualified overtime compensation” for taxable years beginning after December 31, 2024, and ending for taxable years beginning after December 31, 2028. Assuming the effectives dates relate to the service provider’s returns, and most service providers have a calendar year return and are on the cash method of accounting, the deduction would apply to tips and overtime paid in 2025 through 2028. This means the deductions are proposed to be retroactive and proposed to apply to amounts paid even before enactment of the bill.

As an above-the-line deduction, service providers will be able to directly reduce their gross income, whether they itemize or take the standard deduction, by the amount of the qualified tips or overtime. Making this deduction available to the worker creates reporting and withholding obligations for the service recipient, as discussed in more detail below. 

In order to be deductible as qualified overtime compensation, the payment must be overtime paid as required under section 7 of the Fair Labor Standards Act that is in excess of the regular rate (as used in that section) at which such individual is employed. Qualified overtime compensation does not include any amount treated as a qualified tip.

In order to be deductible, qualified tips generally must be paid voluntarily to a person who works in an occupation which traditionally and customarily received tips on or before December 31, 2024. The Secretary of the Treasury is directed to provide a list of occupations that traditionally and customarily received tips in 2024 and before. As proposed, the deduction for qualified tips applies for both employees receiving a Form W-2, and independent contractors receiving a Form 1099-K or Form 1099-NEC, and includes amounts reported by the business on Form 4137. Those whose personal business provides services in accounting, health, law, actuarial science, athletics, brokerage services, consulting, financial services, or the performing arts would not be allowed to claim the tip deduction. In the case of tips received in the course of a trade or business, the deduction is proposed to be limited to gross receipts from the business less costs of goods sold and expenses allocable to such receipts. The Secretary of the Treasury is directed to prescribe regulations to prevent abuse of the deduction and reclassification of income as tips.Continue Reading No Tax on Tips and Overtime Campaign Promises Take Shape in “One, Big, Beautiful Bill”

Companies with a US workforce can expect material changes to employment laws under the Trump administration, with impacts felt across their business operations. President-elect Trump’s first term, his campaign platform, and the typical shifts in a Democratic to Republican transition provide clues about what’s to come: federal agencies, policies and rules will become more business-centered and many of the Biden-era worker-focused protections will be rolled back.

Below are four major shifts we anticipate:

(1) Significant shifts in US Department of Labor policy

The end of the DOL’s 2024 final overtime rule. On November 15, 2024, a federal judge in Texas blocked implementation of the DOL’s final rule in its entirety, thereby preventing the agency from instituting increases to the salary thresholds for the “white collar” overtime exemptions under the Fair Labor Standards Act. While the government may appeal the judge’s order before the change in administration, any such appeal is likely to be short-lived come January 2025.

Accordingly, employers can halt plans to change their compensation levels or exempt classifications in response to the now-blocked rule. If such changes have already been made, employers should consult with counsel on how best to unwind undesirable changes, if any.

A lower burden for employers to classify workers as independent contractors under federal law. Trump will likely reverse Biden’s worker-friendly contractor classification efforts, making it easier for businesses to classify workers as independent contractors, and pivoting away from the Biden administration’s 2024 DOL independent contractor rule.

Notwithstanding this easing at the federal level, employers must remember that, under US and state law, there is no single test for independent contractor classification. Many states have their own tests, which are often more stringent than federal law and that apply to state wage and hour claims. Moreover, even within the same states, different tests will apply to unemployment claims, workers’ compensation, wage and hour, and taxation.Continue Reading Back to Business: Trump’s Second Term and the Four Major Shifts Employers Should Expect