PAYROLL HIGHLIGHT
Navigating Payroll Tax Policy Amid New Tip and Overtime Tax Relief
Before the One Big Beautiful Bill Act( OBBBA) took effect, tip income and overtime income were fully taxable for federal income tax purposes. The new law changes that.
Tip Income Deduction
For 2025 – 2028 tax years, the OBBBA creates a new, temporary federal income tax deduction that can offset up to $ 25,000 of annual qualified tip income. It begins to phase out when modified adjusted gross income( MAGI) is more than $ 150,000($ 300,000 for married joint filers).
The deduction is available if a worker receives qualified tips in an occupation that’ s designated by the IRS as one where tips are customary. However, the U. S. Treasury Department recently released a draft list of occupations it proposes to receive the tax break, and there are some surprising jobs on the list, including plumbers, electricians, home heating / air conditioning mechanics and installers, digital content creators and home movers.
Employees and self-employed individuals who work in certain trades or businesses are ineligible for the tip deduction. These include health, law, accounting, financial services, investment management and more.
Qualified tips can be paid by customers in cash, with credit cards or through tip-sharing arrangements. The deduction can be claimed whether the worker itemizes or not.
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