No tax on tips or overtime sounds simple, but like most things that sound easy, it’s actually not.
A campaign trail promise turned real legislation through Congress' passage of the One Big Beautiful Bill this summer, eligible U.S. workers can pay less in federal taxes on the tips and overtime they’ve earned. But there are some things both employers and employees need to understand about the law, Lorie Maring, partner and member of the Employee Benefits Practice Group at the law firm Fisher Phillips, explained on a recent episode of the CoStar News Hotels Podcast.
“First of all, it’s really not a ‘no tax,’” she said. “It is a deduction, which is a huge distinction. There are also dollar caps on that deduction and income limits, so it’s really not an across-the-board exclusion from income or deduction at all, and there are a lot of nuances within it.”
The good news for the U.S. hospitality industry is that the Internal Revenue Service already has guidance on who is considered a tipped employee, Maring said. Those in roles that have historically received tips as part of their compensation, such as restaurant servers, housekeepers, bellhops and others, made the list.
Eligible employees who file single tax returns must make less than $150,000 to take full advantage of the tip and overtime deductions, she said. Those who are married and filing jointly have to make less than $300,000 together. The maximum deduction for individuals is $12,500, and for those married filing jointly, it’s $25,000.
For tips specifically, allocated tips and automatic gratuities don’t count under the law, she said. It has to be a voluntary tip paid by a customer.
“I think, especially for hotels and others in certain hospitality industries, this is maybe going to be a big disappointment if automatic gratuities are a big part of the compensation,” she said.
There are a lot of nuances with the overtime pay aspect as well, Maring said. It applies only to federal overtime and mandated Fair Labor Standards Act overtime. State overtime and collective bargaining premiums are not part of this.
“This is a huge payroll issue for many employers, because this law goes into effect on Jan. 1, so it’s retroactive,” she said. “Nobody had a heads up this was coming. Nobody was prepared.”
As employers work their way through the new rules, they should communicate to employees what qualifies as a deduction, Maring said. They could hold a FAQ session or town hall meeting or otherwise provide resources to employees to help them understand to prevent frustration.
“The more you can do, and the earlier you can do it to manage expectations, is going to be helpful,” she said.
Ideally, employers have already been talking to their payroll departments or providers to implement ways to track tips and overtime for reporting purposes under the new law, especially since it’s being applied retroactively, she said.
“The good news is this is a little bit of a good faith year,” she said.
For more from the podcast interview with Fisher Phillips’ Lorie Maring, listen to the podcast embedded above.