As a business owner or manager, staying informed about tax changes is crucial to ensuring your employees are well-prepared and can take full advantage of any new benefits. Recently, a new bill has been passed that introduces significant changes to how overtime and tip income are taxed. Here’s what you need to know and how LASSO can help you manage these changes effectively.
Key Provisions of the New Tax Bill
Starting in the next tax filing season, workers will be able to deduct up to $25,000 in tip income and up to $12,500 in overtime pay from their federal taxable wages when filing their tax return. These deductions are designed to provide financial relief to eligible employees, but it’s important to understand how they work.
- Deductions, Not Payroll Tax Exemptions:
- The new tax bill allows for end-of-year deductions, not payroll tax exemptions. This means that tipped employees won’t see an immediate increase in their paychecks, and payroll tax calculations will remain the same.
- Reporting Requirements:
- Employees must continue to report all tips and overtime wages to their employer. This ensures that the necessary taxes are withheld accurately throughout the year.
- Tax Withholding:
- Employers will still withhold federal income tax, Social Security tax, and Medicare taxes based on regular wages, plus any reported overtime and tip income.
- Tax Filing:
- When employees file their tax returns for the year (for example, in early 2026 for the 2025 tax year), they can claim the deductions for qualifying tip and overtime income.
- These deductions will reduce their taxable income, potentially leading to a lower tax liability and a larger refund of federal income taxes that were withheld during the year.
- Expiration and Scope:
- The provisions are set to expire after the 2028 tax year.
- They apply only to federal income tax and do not impact state income taxes.
- The deductions are not available to workers earning over $150,000 per year.
How LASSO Can Simplify the Process
If you are using LASSO’s time tracking system, you are already well-equipped to manage these changes. Our system ensures that all overtime hours are accurately recorded and reported, making it easy for your employees to track and claim their deductions.
Accurate tracking is essential for employees to claim their tax deductions correctly. LASSO’s time tracking system simplifies this process, ensuring that your employees have the necessary information at their fingertips.
Steps to Take
- Educate Your Employees:
- Inform your employees about these new tax provisions and how they can benefit from them.
- Encourage them to keep accurate records of their tips and overtime hours.
- Review Payroll Processes:
- Ensure that your payroll processes are in place to accurately report all income, including tips and overtime.
- Leverage LASSO:
- Consider adopting LASSO’s time tracking system to streamline the process and make it easier for your employees to manage their tax deductions.
State and Local Compliance Still Matters
While the new federal deductions may be a welcome break, state and local wage laws still take precedence when they offer greater protections. That means employers must still follow their state’s minimum wage, tip credit rules, and overtime calculations—even if they differ from federal standards. For example, states like California prohibit tip credits altogether, while others like New York and Illinois have stricter rules for dual-job roles or higher local wage thresholds. Be sure to verify your obligations before applying the federal deduction.
Overtime + Tip Credit = Extra Care
If you’re managing tipped workers who also work overtime, calculating pay correctly can get tricky. Employers must base overtime on the full minimum wage, not the reduced tipped wage. This means the new federal deduction for overtime pay only applies to the additional half-time rate, not the total overtime wage. To stay compliant (and avoid underpayment), double-check your overtime math—especially in states with unique wage laws or higher thresholds.
By staying informed and using the right tools, you can help your employees navigate these new tax changes and potentially save money on their federal income taxes. LASSO is here to support you every step of the way.
