The IRS and U.S. Department of the Treasury have released official guidance clarifying how tips and overtime compensation will be treated for tax year 2025. While the changes primarily impact individual tax returns, employers should understand what, if anything, changes from a payroll perspective.
The Basics
Beginning in 2025, eligible individuals may claim:
- A Qualified Tips Deduction of up to $25,000
- A Qualified Overtime Deduction of up to $12,500 (for overtime pay above an employee’s regular rate)
These deductions are claimed by employees when they file their personal tax returns. They do not change how payroll is processed.
What Employers Need to Know
- No new payroll reporting requirements for 2025
- No changes to W-2 or withholding rules for tips or overtime this year
- Employers are not required to separately track or report “qualified” tips or overtime in 2025
Employees will determine eligibility and calculate these deductions when they file their individual returns using IRS guidance and their pay records.
What This Doesn’t Change
- Gross wages are still taxable and reportable as usual
- Employers must continue to withhold and remit payroll taxes on tips and overtime
- Overtime calculations, tip reporting, and payroll compliance rules remain the same
Looking Ahead
The IRS has indicated that updated reporting requirements may apply in future tax years, possibly starting in 2026. We’re monitoring developments closely and will communicate any changes that impact payroll processing.
How We’re Supporting You
As your payroll partner, we’ll continue to ensure your payroll is processed accurately and in compliance while keeping you informed of regulatory changes that affect your business and your employees.
As always, please contact us with any questions.