Updated August 17, 2025
President Trump signed the “One Big Beautiful Bill” into law, which will soon have a significant impact on both employers and employees. Enacted on July 4, 2025, the Act introduces major changes across a broad range of compliance areas, including paid family leave and new individual income tax deductions for tips and overtime.
Paid Family and Medical Leave
The Bill makes the paid leave tax credit permanent, allowing employers to claim credits for wages or insurance premiums paid for family leave, starting in 2026, as long as they have a written leave policy (with some exceptions).
“No Tax on Tips”
Effective for 2025 through 2028, employees who customarily and regularly receive tips may deduct up to $25,000 in qualified tips from their income subject to federal income tax. Qualified tips include voluntary cash or charged tips received directly from customers or distributed through tip pooling or sharing arrangements.
Employers must continue reporting tips on Form W-2 for employees and Form 1099 for non-employees. The annual deduction is capped at $25,000 and begins to phase out when an individual’s modified adjusted gross income (MAGI) exceeds $150,000 ($300,000 for joint filers).
“No Tax on Overtime”
The Act also allows workers to deduct up to $12,500 in qualified overtime pay ($25,000 for joint filers) from their income, subject to federal tax.
Qualified overtime compensation must be reported by employers on Form W-2 for employees and Form 1099 for non-employees. As with the tip deduction, the overtime deduction phases out when MAGI exceeds $150,000 ($300,000 for joint returns).
What Employers Should Do
Employers should review payroll systems to ensure overtime premiums and tip income are tracked separately, as these amounts may need to be reported differently on W-2s and 1099s under the new law.
Now is the time to coordinate with payroll providers and tax advisors to prepare for these changes, including any system updates or reporting adjustments. Training staff on proper classification will also help ensure compliance.
These deductions are temporary and are set to expire on December 31, 2028, unless extended by future legislation.
Schedule a call with us to explore how we can help support your compliance.
