On July 4, 2025, a new law was signed that exempts certain earnings from federal income tax. Please be advised that the available credits will not be processed through employees’ paychecks. It will be a deduction which can be claimed when they file their personal tax returns.
Based on the limited information available at this time, please review the guidelines below:
Tips:
- Up to $25,000 in tips per year are now deductible from federal income tax on your federal tax return.
- Social Security and Medicare (7.65%) payroll taxes and State Withholding taxes will not be impacted.
- The deduction applies retroactively for tips earned in 2025.
- A list of qualifying occupations (e.g., servers, barbers) will be published by the Treasury soon.
- Workers must have valid Social Security numbers to claim the deduction.
Overtime:
- Workers can deduct up to $12,500 ($25,000 for joint filers) in “qualified overtime compensation.”
- Only FLSA-required overtime premiums qualify (e.g., time-and-a-half pay beyond 40 hours/week).
- State- or contract-based overtime rules (like California’s daily OT) do not apply.
- Only the premium portion (e.g., If the employee’s regular rate is $20 an hour, the $10 extra per hour over regular pay) is deductible—not the full overtime amount.
We will continue to monitor this law and provide compliance updates as they are received.
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