“No Tax on Tips and Overtime!”

July 10, 2025

Let us assume, for the moment, that staff in our industry do not receive “tips;” but many are certainly paid overtime.  And, that all providers are properly calculating and paying “overtime” to eligible non-exempt employees:

“The federal overtime provisions are contained in the Fair Labor Standards Act (FLSA). Unless exempt, employees covered by the Act must receive overtime pay for hours worked over 40 in a workweek at a rate not less than time and one-half their regular rates of pay. There is no limit in the Act on the number of hours employees aged 16 and older may work in any workweek. The FLSA does not require overtime pay for work on Saturdays, Sundays, holidays, or regular days of rest, unless overtime is worked on such days.

“The Act applies on a workweek basis. An employee’s workweek is a fixed and regularly recurring period of 168 hours — seven consecutive 24-hour periods. It need not coincide with the calendar week, but may begin on any day and at any hour of the day. Different workweeks may be established for different employees or groups of employees. Averaging of hours over two or more weeks is not permitted. Normally, overtime pay earned in a particular workweek must be paid on the regular pay day for the pay period in which the wages were earned.

DOL – Wage and Hour Division


The Bill signed into law on 4 July (the “Act”)  which applies to tax years 2025 – 2028 requires the following:

“The Act creates a tax deduction for “qualified overtime compensation.” Qualified overtime compensation is defined as “overtime compensation paid to an individual required under section 7 of the Fair Labor Standards Act of 1938 [FLSA] that is in excess of the regular rate … at which such individual is employed.” The following conditions apply:

 

• The deduction is capped at $12,500 ($25,000 in the case of a joint return) in any taxable year. This amount is reduced by $100 for each $1,000 by which the taxpayer’s modified adjusted gross income exceeds $150,000 ($300,000 in the case of a joint return).

 

• The deduction applies only to overtime compensation that is “required” under the FLSA and only to the amount that is in “excess” of the employee’s “regular rate.” The deduction does not apply to overtime premiums that are not “required” by the FLSA but instead are paid pursuant to contract (including a collective bargaining agreement) or because they are required under state law only (e.g., California law requiring daily overtime for hours worked in excess of eight in one day).

 

Employers must include the total amount of qualified overtime compensation as a separate line item on the Form W-2. In 2025, the Act authorizes the reporting party to “approximate” the amount designated as qualified overtime compensation pursuant to a “reasonable method” to be specified by the Treasury secretary.

Employers are still required to take taxes out on overtime!  Clearly, you will need a conversation with your payroll company or CPA to assist with changes to the W-2 reporting.

Thanks to SESCO for the detailed information!