Payroll planning
New tip and overtime deductions make payroll detail more important
The temporary deductions apply for 2025 through 2028, but they do not eliminate payroll tax and they do not cover every dollar labeled as a tip or overtime payment.
Employers should preserve enough payroll detail for employees to identify potentially qualified amounts. Employees should not assume that gross overtime pay or every gratuity shown on a pay stub equals the federal deduction.
Qualified overtime is only the premium portion
The deduction generally covers the portion of Fair Labor Standards Act overtime compensation above the employee’s regular rate—for example, the extra half in time-and-a-half—not the employee’s full overtime wages.
The annual limits and phaseouts matter
The overtime deduction is generally limited to $12,500, or $25,000 for joint filers. The tip deduction is generally limited to $25,000. Both begin phasing out above $150,000 of modified adjusted gross income, or $300,000 for joint filers.
Not every tip qualifies
Qualified tips must meet the federal definition and come from an eligible occupation. Mandatory service charges and payments that do not meet the voluntary-tip rules require separate treatment.
Payroll tax still applies
The provisions are individual income-tax deductions. They do not generally remove qualified amounts from Social Security, Medicare, or applicable payroll-tax reporting, and employers still need accurate wage and tip records.
Configure payroll to distinguish regular pay, the overtime premium, reported tips, service charges, and occupation information. Clean detail helps employees calculate the deduction without changing wage-tax compliance.
Apply the guidance to your facts
Discuss the accounting and tax decisions behind the form.
We begin with the records, entity structure, timing, and decisions that apply to your situation.
Schedule a complimentary callThis article provides general educational information and is not individualized accounting, legal, investment, or tax advice. Tax rules and forms change; confirm the current requirements for your facts before acting.