Recent legislation has created new deductions for tips and overtime pay, and there are steps you should take now to ensure compliance and help your employees maximize these benefits.
New Tips Tax Deduction – Who Qualifies
The Treasury Department has identified 68 occupations eligible for a new tips tax deduction across eight major categories. While we’re waiting for the official list (due October 2, 2025), the preliminary guidance includes traditional tipped positions like servers and bartenders, plus some you might not expect: digital content creators, entertainers, home service workers, and personal care professionals.
If you have employees in these roles, they may be able to deduct up to $25,000 annually in tips they receive from customers. This includes cash tips, credit card tips, and tip-sharing arrangements. The benefit phases out for higher earners – those making over $150,000 (single) or $300,000 (married filing jointly).
What You Need to Do Now
Start Better Tip Tracking: Even though the final rules aren’t out yet, your tipped employees should begin keeping detailed records immediately. This means documenting:
Identify Qualifying Employees: Review your workforce to determine which employees work in potentially qualifying positions. You’ll need to track this information for proper reporting.
Prepare for New Reporting Requirements: Starting with 2025 income (reported in 2026), there will be significant changes to Form W-2. The IRS has already released draft forms showing new boxes and codes specifically for qualified tips and overtime compensation.
Overtime Deduction Details
There’s also a separate deduction for qualified overtime pay – up to $12,500 for single taxpayers and $25,000 for married couples filing jointly. The same income limits apply as the tips deduction.
Payroll and Withholding Considerations
Here’s something important: the IRS won’t be updating withholding tables for 2025, even though these deductions apply to 2025 income. This means your eligible employees may have too much tax withheld during the year and should expect larger refunds when they file in 2026.
For employees who expect significant tip or overtime deductions, we may need to discuss estimated tax payment adjustments to optimize their cash flow.
Self-Employed Clients
If you’re self-employed in a service industry, you may qualify for the tips deduction if your work falls under the Treasury’s definition of a “traditionally tipped occupation.” However, you can’t deduct more than your actual net business income from tip-earning activities.
Special Savings Accounts
The new law also creates “Trump Accounts” – special savings accounts for children born between 2025-2028. The federal government contributes $1,000, and families can add up to $5,000 annually. If you’re considering offering this as an employee benefit, there will be new reporting requirements on Form W-2.
Next Steps
We are monitoring the IRS website and Treasury announcements closely as more guidance becomes available. In the meantime:
Questions?
These changes will significantly impact how we prepare 2025 tax returns, and proper preparation now will ensure your business and employees can take full advantage of these new benefits. Please reach out if you want to discuss how these changes might affect your specific situation or if you need help implementing new tracking systems.
The final rules and official occupation lists should be available by October 2025, but starting good recordkeeping practices now will position you for success regardless of the final details.
Christine Gervais
Christine Gervais is a licensed CPA, using her skills to help businesses grow and achieve their fullest potential. Christine has a Master’s degree in accounting from Southern New Hampshire University in addition to holding her CPA license for over a decade. Notably, Christine is a nationally recognized speaker providing education to other CPAs on how to best serve clients as well as instruction on a wide variety of topics for business owners on how to maximize success. Christine prides herself on the value she can bring to clients with her extensive tax knowledge and provides strategic, forward-thinking financial strategies to help clients grow. When not behind her desk, you can find Christine spending quality time with her daughter and stepson or tending to the family’s excessively loved farm animals.
