• While the act uses the term “Cash tips”, any tips paid in cash or charged are included as well as tips received under any tip-sharing arrangement. 

• For regular payroll purposes, there is no change to calculating Federal income tax withholding on tip income.  This is a deduction that will apply only when a qualified individual files an annual Federal income tax return. 

• The maximum deduction is $25,000 but is reduced once adjusted gross income exceeds $150,000 for single filers or $300,000 for married filers. 

• All tips properly configured in CTR software are already reported separately on the W-2. 

• This deduction extends to compensated non-employees receiving tips, but those reporting requirements have not yet been defined. 

What about the elimination of Tax on Overtime? 

• The deduction is only for the Overtime Premium.  That is, the additional amount paid above the regular hourly rate for work exceeding the hours limitation in the Fair Labor Standards Act (typically 40 hours per week). 

• This deduction does not include overtime not required by the FLSA including automatic overtime over 8 hours per day, California mandated overtime, etc. 

• The tax deduction is limited to $12,500 for single filers and $25,000 for married filers.  These amounts are reduced when the adjusted gross income exceeds $150,000 for single filers or $300,000 for married filers. 

• For payroll purposes, there is no current change to calculating Federal income tax withholding on overtime income.  This is a deduction taken when the employee files an annual Federal return. 

• It appears that for future years there may be a method by which an employee can anticipate overtime pay for the year and use that to reduce Federal withholding in a manner similar to the current dependents or deductions credits but that has not yet been defined. 

• Tax withholding and reporting of employee compensation is still required, and overtime wages will need to be separately identified on Form W-2 (but there is no current definition of how this will be accommodated.) 

• For 2025- there is a Transition Rule that will allow an approximate reporting of these amounts using methods to be specified. 

What about the Extension of the FICA Tip Credit? 

• This is a business credit, not a payroll item or tax, that has been available to food and beverage employers only. 

• This credit is now available for barbering, hair care, nail care, esthetics, and body and spa treatment employers with tipped employees. 

• The credit provides a reduction in Federal income taxes based upon the matching Social Security and Medicare taxes paid by employers on tips earned by employees that are not used to bring the employee wages up to minimum wage standards. 

• While not a payroll item, payroll data is used to calculate the credit amount.
   

Frequently Asked Questions: 

Q: Is there anything that I need to do with my payroll now to reduce regular Federal income tax withholding for employees with tips or overtime?  

A: No, these deductions will be taken when an annual Federal return is filed and will not reduce current withholding.  Tips and OT will be reported on the employees’ W-2.  We are awaiting guidance from the IRS as to how they should be reported and will communicate with clients that may be impacted.      

Q: Is Prevailing Wage included in the premium calculation?

A: No, only the premium paid for work meeting the FLSA requirements 

Q: What needs to be done for employees who terminated prior to the passing of this law?

A:The payroll software will report the tips and overtime premium for all employee within the calendar year. 

Q: Will tips automatically added to a check count?

A: No, technically these are not defined as tips.  The true definition of tips is a voluntary amount paid by the customer.  These automatic amounts will not qualify for the deduction. 

Q: Will required, automatic, lunch breaks for 30 or 60 minutes each day create a problem? 

A: So long as the employee is not doing any work during that time, it is not considered paid time and would not accumulate overtime pay. 

Q: Are bonuses addressed in this law?

A: No, there is nothing direct in the law about bonuses.  Bonuses do, however, affect overtime calculations but their impact would be part of the regular overtime reporting

 ➡️What Employers Should Do Now

For now, no immediate payroll processing changes are required, but preparation is key. Stay tuned as CTR’s tax and compliance experts continue to monitor IRS guidance to ensure your payroll reporting remains accurate and compliant.

✴️Need Help Navigating Compliance? Contact CTR Payroll | HR today!