JULY 23, 2025
Starting January 1, 2025, a newly signed federal tax law will introduce key changes that directly impact how employers report tips and overtime – and how employees may benefit from new personal tax deductions.
We know compliance isn’t just about regulations – it’s about people, paychecks, and preparedness. Let’s walk through the two biggest updates you should know and what actions you need to take to stay ahead.
1. New Federal Tax Deduction on Tipped Income
For tax years 2025 through 2028, qualifying employees may be eligible to deduct up to $25,000 annually on their federal income tax return for qualified tip income.
What Employers Need to Know:
- Employees must have worked in a tipped role before 2025 to qualify.
- This is a personal tax deduction claimed during tax filing – it will not affect take-home pay or withholding amounts.
- Employers are still responsible for tracking and reporting tips on the W-2 form.
- You cannot guarantee employee eligibility, but you can inform and encourage them to consult a qualified tax preparer.
Why This Matters:
Even though this doesn’t impact your payroll process directly, your employees may have questions. Clear, proactive communication is essential to help them understand how this deduction works and what it means for their personal tax planning.
2. New Federal Tax Deduction on Overtime Pay
For the same tax window (2025–2028), employees may also be able to deduct up to $12,500 annually (or $25,000 if filing jointly) for federally required overtime pay.
Key Details:
- Only overtime that qualifies under FLSA Section 7 (federal law) counts. Overtime required only by state law is not eligible.
- Income phaseouts apply, starting at $150,000 for individuals and $300,000 for joint filers.
- Like the tip deduction, this is a tax-time benefit – not a change to weekly or monthly payroll amounts.
- Employers must track and report eligible overtime on employee W-2s.
Why This Matters:
This creates an important compliance checkpoint for employers. You’ll need to distinguish between federally required and state-mandated overtime in your records. Ensure your payroll system and reporting workflows are equipped to handle this nuance accurately.
How Employers Should Prepare
Navigating new legislation doesn’t have to be overwhelming – especially when you have the right partner by your side. Here’s what we recommend:
Educate Your Team
Make sure employees understand that these are deductions claimed during tax filing, not changes to their regular pay.
Be Transparent About Limitations
Let your employees know that you can’t confirm their personal eligibility – and encourage them to consult a tax professional.
Update Your Reporting Practices
Ensure your payroll system can accurately report qualified tips and overtime on 2025 W-2s.
Lean on Payroll Expertise
Have questions? That’s why we’re here. Our team is ready to help you implement necessary changes and communicate effectively with your employees.
Final Thought
While these new deductions offer potential financial benefits for your team, they also place greater responsibility on employers to ensure accurate reporting. Clear communication and precise recordkeeping are your best tools to navigate these changes successfully.
At Payroll Vault, we're here to help you stay compliant and confident – today and in the years to come. We pride ourselves on providing personalized service that is warm, professional, and helpful. Our team understands the importance of being responsive and clear – while always maintaining strong boundaries to ensure data security and compliance at every step.
Need support or have questions about your payroll process? Let’s talk. Find a Payroll Vault location in your area today to get the conversation started!
