No Tax on Tips and Overtime: What Employers Need to Know Now

The two most talked-about provisions?
✅ No federal income tax on tips
✅ No federal income tax on overtime pay

While this is exciting news for millions of workers, there are still unanswered questions—particularly around payroll reporting. Let’s break down what’s known now, and what’s still to come.

No Tax on Tips

Under the new law, tips will no longer be subject to federal income tax for eligible workers. This applies to both cash and credit card tips.

According to IRS guidance, the exemption applies to dozens of service-industry occupations—from restaurant servers, hotel staff, and ride-hail drivers to hairstylists, DJs, digital content creators, and even self-enrichment teachers. Newsweek reports that 68 different jobs are covered under this provision.

For employees, this could mean significantly more take-home pay. For employers, it immediately raises the question: how do we handle reporting?

No Tax on Overtime

The same legislation also exempts overtime pay from federal income tax. This change is designed to reward employees who put in extra hours and encourage workforce participation.

Once again, this creates real financial benefits for employees—but also introduces questions for payroll teams. Will overtime wages still appear on W-2s? How will Social Security and Medicare contributions apply? Will states follow suit or maintain their own rules?

What’s Still Unclear

The IRS has confirmed these provisions are law. However, the U.S. Treasury Department is expected to release detailed guidance in October 2025 that will clarify critical points for employers, including:

• Whether tips and overtime still need to be reported as gross wages on W-2s
• How Social Security and Medicare contributions will be handled
• Whether states will adopt the same rules or require different treatment
• What compliance and enforcement will look like

Until this guidance is released, employers should not make changes to payroll reporting. The law is in place, but the reporting framework is not yet finalized.

What Employers Should Do Now

It’s natural that clients and employees will have questions. Here’s the best course of action in the meantime:

1. Stay informed. The rules are official, but details are pending.
2. Don’t change reporting yet. Wait for Treasury’s instructions in October.
3. Be prepared to adjust. Once guidance is issued, employers may need to update payroll processes quickly.

At Brand’s Payroll, we’re already reviewing the implications of these changes and coordinating with industry experts. Our priority is to make sure you have a clear, actionable plan once the Treasury guidance arrives.

The Bottom Line

The headlines are simple:

• No tax on tips for qualifying jobs.
• No tax on overtime for all workers.

The fine print? We’ll know more in October when the Treasury issues its final guidance.

Until then, treat this as good news on the horizon—and know that we’ll be here to help you navigate every step of the reporting process once the full rules are released.