OBBB 2025 Tax Reform Act
On July 4th, 2025, the Tax Reform Act of 2025, known as the One Big Beautiful Bill (OBBB), was signed into law, bringing significant changes to federal income tax treatment for those making tips and overtime. Under the OBBB Act, employees may now exclude both tip income and overtime wages from federal income tax. These provisions represent a significant shift in wage taxation policy, aimed at increasing take-home pay for hourly workers while imposing new compliance considerations for employers.
To help employers and employees better understand and prepare for these changes, Martin D. Hauptman, Partner in the Tax, Trusts, and Estates and Labor and Employment Practice Groups, addresses common questions in a recent Q&A. In the following video, he offers practical insights into eligibility, compliance, and implementation under the 2025 Tax Reform Act.
Q: Can cooks or dishwashers claim the tip deduction?
A: “Only if their occupation is on the Treasury list to be published,” Hauptman explains.
Eligibility will be determined based on whether the role is considered a “customarily tipped position” as of December 31, 2024, according to Treasury Department guidance.
Q: Are tips and overtime exempt from all taxes?
A: “No,” Hauptman clarifies. The OBBB Act only affects federal income tax. Payroll taxes like Social Security, Medicare, and any state or local taxes still apply. This means employees will still see deductions on their paychecks—just not federal withholding on qualifying tip and overtime income.
Q: Can the same income be used for both deductions—tip and overtime?
A: “No. There’s no double dipping, that’s specifically prohibited.” Income must be categorized clearly and cannot be claimed under both deductions, even if it qualifies as both tipped and overtime pay in practice.
Q: What steps should a restaurant owner take to stay in compliance?
A: According to Hauptman, business owners should take the following key steps to comply with the Tax Reform Act:
- Review and update payroll systems to track and report qualified tip and overtime income.
- Train managers and payroll staff on the new compliance and reporting requirements.
- Monitor IRS and Treasury guidelines for updates to eligible occupations and reporting standards.
- Communicate clearly with employees about how the new tax changes affect their pay and withholding.
The OBBB Act introduces meaningful benefits for hospitality workers, but it also requires accurate implementation and proactive compliance. With evolving federal guidance, employers must stay alert to changes and help employees understand their new tax advantages.
If you or your business has questions about complying with the OBBB Tax Reform, please reach out to Martin D. Hauptman at mhauptman@mblawfirm.com or at 973-243-7912.
Watch the full Youtube video here.