President Trump signed his “One Big Beautiful Bill Act” into law on July 4th, which includes a few of his “signature” tax promotions, “no taxes on tips and no taxes on overtime.” This PayDay will provide some details about these two provisions PLUS a brand new FICA tip tax credit available to employers in the “beauty services” industry (very similar to the long-time FICA tip tax credit which restaurants have been able to claim since the early 1990’s). This PayDay will not explore some other huge provisions in the OBBB, such as maintaining the 2017 tax cut provisions, state/local taxes (SALT), state income tax deductions for business PTET provisions, permanency of the Section 199A QBI deduction at its current 20% deduction rate, so forth and so on—-the OBBB is a massive piece of legislation which contains over 900 pages of new legislation!
NO TAX ON OVERTIME
A portion of the overtime received by hourly workers will be exempt from Federal income tax, retroactive to January 1, 2025. The basic details of this “no tax on overtime” provision are as follows:
- Up to $12,500 per year of the “overtime premium component” of total overtime paid can be claimed as a Federal income tax deduction by the worker on their annual personal tax return Form 1040;
- This exemption/deduction is limited to income levels below $150K for single taxpayers/$300K for those filing jointly with spouses
- This tax deduction is temporary, ending at the end of 2028
- Employers are required to report “qualified overtime income” on the employee’s W-2 form (another W-2 box!)
- The Treasury/IRS is planning on creating either new withholding tax tables OR a new deduction on an employee’s W-4 form so that federal income taxes are not withheld on the OT premium portion of overtime pay
- Only Federal income tax is excluded from tax—-FICA/Medicare taxes as well as most state/local taxes will continue to apply to all overtime pay; and
- Overtime pay will continue to have federal income tax withheld until the Treasury Department provides details to employers as to procedures—-new W-4 forms, new tax withholding tables, etc.
Here is an example of how “no taxes on overtime” will work, starting with this year/2025:
John Doe is an hourly employee for XYZ, Inc, and earns a regular rate of pay of $20 per hour. John works 45 hours one week, resulting in overtime pay of 5 hours at $20 regular rate PLUS $10 in OT premium pay. John will be entitled to an overtime pay tax deduction on his Form 1040 equal to $50 (the OT premium amount of his pay). John’s net paycheck may decrease once Treasury releases new tax tables or new W-4 amounts for the OT deduction.
XYZ, Inc will report “qualified overtime pay” in a separate box on John Doe’s 2025 W-2 form—-XYZ, Inc will rely on Treasury guidance as to reporting the overtime pay “premium” on John’s W-2 form (retro to 1/1/25).
NO TAX ON TIPS
Workers in industries in which “tips” are customarily/regularly paid can claim a Federal income tax deduction for up to $25,000 of “qualified tip income,” for years 2025-2028. Basic details of “no tax on tips” are as follows:
- A “qualified tip” eligible for Federal income tax exclusion is paid in cash/card/tip pool from consumers who are free to determine the tip amount AND in an industry which customarily and regularly includes tipped employees. Treasury will provide a list of industries which qualify for this tax deduction, which will include food/beverage establishments, beauty service providers and others as Treasury will soon define
- Service charges imposed by restaurants will not be eligible for “no tax on tips”—the “tip” must be freely negotiated and voluntarily paid by the consumer
- Like “no tax on overtime, the “no tax on tips” federal income tax deduction is claimed on the employee’s Form 1040 as a personal income tax deduction and is limited workers with below $150K of annual income
- The employer will calculate and report the “qualified tip income” on the employee’s W-2 form
- • Only Federal income tax is excluded from tax—-Fica/Medicare and state/local income taxes will continue to apply to total tip income
BRAND NEW FICA TIP TAX CREDIT TO EMPLOYERS WHO ARE IN THE BEAUTY INDUSTRY AND WHO HAVE EMPLOYEES WHO REPORT TIPPED INCOME TO THEM
Spas, barbers, salons, and similar “beauty service providers” pay FICA/Medicare tax at a rate of 7.65% on tips reported to them by their tipped employees (just like restaurants). Food/beverage establishments have long been entitled to a Federal income tax credit for their payment of “matching” FICA/Medicare taxes on reported tips which are in excess of minimum wage. The OBBB is now extending the FICA tip tax credit benefit to employers in the “beauty services industry” for payroll taxes paid on tips reported to them by their tipped employees, effective for this year 2025. The income tax credit will likely be claimed at year-end by the employer and will either offset employer income taxes paid at the corporate level OR will flow through to the owners of the employer as tax credits on owners’ personal income tax returns. Treasury will develop “reporting requirements” for this brand new group of “beauty service industry” employers with which to claim the annual Federal income tax credit.
WHAT ABOUT NO TAX ON SOCIAL SECURITY BENEFITS?
The OBBB has no specific provision which provides for a direct reduction in tax paid on social security benefits. The OBBB does provide for a new “senior tax deduction” which will lower the senior’s taxable income as well as the senior’s “base” for calculating taxable social security benefits. This new “senior tax deduction” is available to taxpayers who are age 65 or greater and whose income is “generally below” $75K single/$150K married. As far as actual reduction in how much taxes are paid on social security benefits, both lower and higher income seniors will likely not receive any extra benefit with the bulk of the reduction in social security benefit taxes going to “middle income seniors” (lower income seniors are not currently paying tax on social security benefits, whereas high income seniors will not be entitled to this new senior tax deduction).
ACCUPAY WILL CONTINUE TO STAY INFORMED AS TO GUIDANCE FROM TREASURY ABOUT NEW WITHHOLDING TABLES AND OTHER DIRECTIVES TO IMPLEMENT THE NO TAX ON TIPS/OVERTIME PROVISIONS OF THE OBBB.
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