The new legislation signed by President Donald Trump introduces temporary federal tax deductions for tips and overtime pay. Here's a summary of how it works.
No Tax on Overtime Pay
- Deduction Amount: Workers can deduct up to $12,500 in overtime pay ($25,000 for joint filers) from their taxable income on their federal tax returns.
- Income Threshold: The deduction is reduced by $100 for each $1,000 earned above $150,000 ($300,000 for joint filers).
- Effective Period: The deduction is retroactive to January 1, 2025, and expires on December 31, 2028.
- Reporting: Overtime compensation must be reported on Form W-2, Wage and Tax Statement.
No Tax on Voluntary Tips
- Deduction Amount: Workers can deduct up to $25,000 in reported tips from their taxable income.
- Income Threshold: The deduction is reduced by $100 for each $1,000 earned above $150,000 ($300,000 for joint filers).
- Effective Period: The deduction is retroactive to January 1, 2025, and expires on December 31, 2028.
Key Points to Note
- Immediate Paycheck Impact: There won't be an immediate boost in take-home pay as employers will still withhold federal taxes from tips and overtime throughout 2025.
- State Taxes: State income taxes still apply, so these deductions won't affect state returns.
- Year-End Savings: Workers will see the savings when they file their taxes in early 2026, potentially lowering their tax bill or increasing their refund.
Additional Changes
- Form 1099 Reporting Threshold: The reporting threshold for Form 1099-MISC and Form 1099-NEC will increase from $600 to $2,000 starting with payments made in 2026, subject to inflation adjustments beginning in 2027.
Payroll.Org's Preparing for Year-End programs this fall will provide updates on the latest changes in legislation and regulations affecting the close of 2025 and the first payroll of 2026.
