No Tax, No Problem for Hospitality Employers, Part 1: The New No Tax on Tips and Overtime Provisions Explained

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Scott DeLuca: Hello and welcome to the first of a new podcast series offered by Ogletree Deakins entitled No Tax, No Problem for hospitality employers. Today’s session is part one of this series and is entitled The New No Tax on Tips and Overtime Provisions Explained. My name is Scott DeLuca; I am an of counsel attorney with Ogletree Deakins, and I sit in the firm’s Buffalo, New York office. In addition to serving our clients, I serve as the co-chair of Ogletree Deakins hospitality industry group. I’m joined today by two of my fantastic Ogletree colleagues, and I’m going to ask them to introduce themselves right now. First, we have Chris Hammond. Chris.

Chris Hammond: Thank you, Scott. My name is Chris Hammond, I’m a shareholder in the firm’s Miami office. I’ve been with the firm for approximately 20 years, and I have the privilege of serving along with Scott as the co-chair of our firm’s hospitality industry group.

Scott DeLuca: Thank you, Chris. And we’re also joined today by Mike Mahoney. Mike?

Mike Mahoney: Hello, everyone. Thanks for taking the time to listen to this podcast. I’m Mike Mahoney, a shareholder in Ogletree’s Morristown, New Jersey and New York City offices. I’m privileged to serve as the chair of the newly formed Employment Tax Practice Group. And I’m happy to be talking to you today about the no tax on tips and no tax on overtime provisions under the One Big Beautiful Bill.

Scott DeLuca: Thank you, Mike. So, as he indicated, yes, we are here to talk about the sweeping changes that were instituted by the One Big Beautiful Bill Act regarding taxes on tips and overtime specifically in the hospitality industry. So, with that in mind, we’re going to turn to our first question. What exactly is the One Big Beautiful Bill, and why should hospitality employers care about this?

Mike Mahoney: So, the One Big Beautiful Bill Act is a sweeping federal law signed on July 4th, 2025, aimed at reducing the tax burden on workers and encouraging workforce participation. Two of the provisions really jump off the page for restaurants, hotels, resorts, and event venues, and those are the no tax on tips provision and the no tax on overtime provision. These provisions apply retroactively to the beginning of 2025 and are operative through 2028. They enable employees to lower their federal income tax liability through an income tax deduction, and they will also impact and affect how employers report wages on Forms W-2 and tax withholding, prospective from 2026.

Chris Hammond: Let’s go ahead and start with tips. That’s a matter of great importance to hospitality employers. Mike, what does the no tax on tips provision actually do?

Mike Mahoney: So, beginning with this year 2025, and again retroactive to January 1st, employees who are in an occupation that customarily and regularly receives tips can deduct up to $25,000 per year in qualified tips from their taxable income. Now the key here is that it has to be qualified tips. Qualified tips are voluntary cash or charge tips, including tips received through tip sharing pools. What it does not include are mandatory tips, so things like service charges or if you’ve ever been to a restaurant where they add a tip amount for parties that are six or greater or something like that. Those are not considered voluntary and therefore ineligible for the deduction. To say no tax on tips is a slight misnomer because there are deduction phase outs by $100 for every thousand dollars of modified adjusted gross income, over $150,000 for single filers or $300,000 for joint filers. Also, an additional feature is that employees do not need to itemize. Instead, this is an above the line deduction on an individual’s personal income tax return. So, they can claim this no tax on tips deduction in addition to the standard deduction on their tax return.

Scott DeLuca: Mike, you brought up a really interesting question that I just want to think about for a second out loud. When you talk about qualified tips, banquets, which a lot of our hospitality employers are going to hold, those usually include both perhaps a service charge and a gratuity. So, is that the type of involuntary tip situation so that banquet servers are not going to be able to use this?

Mike Mahoney: Potentially yes. The amount has to be voluntary, so the customer has to have the ability to adjust the amount without repercussion. So, if you think about banquet service charges or mandatory tips for banquet servers, those are not eligible for negotiation. The person cannot say, even though you charge a mandatory 18%, I only want to give 12%, which would mean it’s no longer voluntary and therefore is not a qualifying tip.

Scott DeLuca: Okay. So, if a banquet charges, as you suggested, 18%, but a person decides to give greater than that, it’s possible that the greater amount may be deemed a qualifying tip because it’s voluntary, maybe?

Mike Mahoney: Correct. So, if a person gave 22%, even though they were only required to pay 18%, the 4% would be voluntary.

Scott DeLuca: Okay, great. Thanks so much, Mike. I appreciate that clarification.

Chris Hammond: Mike, does the new law eliminate payroll taxes on tips as well?

Mike Mahoney: No. FICA taxes or social security and Medicare taxes and FUTA still apply, so employers must still continue to withhold and make those contributions on their own on any qualifying tip amounts. The One Big Beautiful Bill Act only affects federal income tax on the employee side.

Scott DeLuca: Mike, how do we know which jobs qualify as tipped occupations?

Mike Mahoney: So, on September 19th of this year, the Treasury Department and IRS issued proposed regulations, listing 68 occupations across eight industry categories, many of which are central to hospitality. So, for restaurants, casinos, hotels, resorts, golf courses, cruise ships, and similar venues like that. The list includes bartenders, waitstaff, food servers, including those that are outside of a restaurant, dining room and cafeteria attendance, bartender helper, chefs and cooks, food preparation workers, fast food and counter workers, dishwashers, host staff, including those in a restaurant, lounge and coffee shop, bakers, gambling dealers, gambling change persons and booth cashiers, gambling cage workers, gambling in sports book, writers and runners, concierges, baggage porters and bellhops, hotel, motel and resort clerks, maids and housekeeping cleaners, locker room, coatroom and dressing room, attendance, ushers, lobby attendance, ticket-takers, parking and valet attendance, taxi and ride-share drivers, shuttle drivers, goods delivery people, personal vehicle and equipment cleaners, private and charter bus drivers, water taxi operators and charter boat workers, rickshaw, petty cab and carriage drivers and home movers.
I think what’s interesting about this list is that some, while they’re on the list of customarily and regularly tipped, we wouldn’t necessarily think of them as being tipped by the customer directly. For example, a dishwasher is not someone who, I would say, typically receives the tip directly. So, I think the list reflects an understanding on the part of the Treasury Department and IRS that beyond what we customarily think of as tipped roles, there are many jobs, especially in the hospitality industry that are nonetheless reliant upon tips and therefore they’re included on this list. What the challenge really here for employers is tracking this list closely, and of course they should be ready to comment if a key role is missing from their industry or if it’s misclassified.

Scott DeLuca: Is the list that you just shared with us, is that the final list or is there going to be changes to the list or a more formalized list?

Mike Mahoney: The proposed regulations will be finalized after a comment period in which employers and industry groups are able to comment on the list and provide their feedback.

Scott DeLuca: Okay, great. That’s helpful, Mike. What happens if I work for in a job title in the hospitality industry or another industry and my job title is not listed amongst those that you just shared with us or that the Treasury Department ultimately includes in its regulations?

Mike Mahoney: So, for now, if the occupation is not on the list, the employee cannot claim the income tax deduction on their tips. The Treasury Department has left the door open for future changes to these rules, but currently the safe course and compliant with the regulations and the statute is to rely on the published list and distinguish between the qualifying jobs and those that do not.

Chris Hammond: Mike, what happens if an employee’s job title is not listed by the IRS but their actual work, that is to say their job duties, really match one of the covered occupations? What should employers do there? In other words, should the determination be based on the job title or on the job duties?

Mike Mahoney: So, the existing IRS guidance emphasizes that the occupation is defined by the published list, but it is a best practice to look beyond just the official job title and focus on the job duties. If an employee’s primary duties and day-to-day work align with a listed tipped occupation, even if their job title is different, employers should carefully document the actual task perform to ensure that that individual may be eligible for the deduction. This documentation is really going to help, support in the event of an IRS examination or audit, if that deduction is challenged, and it may also help the employee as well if the deduction is challenged on their personal income tax return. However, until the IRS provides additional clarification, employers should be cautious and may want to consult legal counsel before treating employees with unlisted titles as eligible especially for large or ambiguous roles. Again, when in doubt, rely on the published list and keep records of both job titles and actual duties.

Chris Hammond: Mike, all of these changes are obviously going to require employers to report and to categorize income to the employee, wages to the employee, tips to the employee in different categories, perhaps in what they’re doing now. How is the Form W-2 going to change for 2026 given all these changes?

Mike Mahoney: So, fairly recently, the IRS released a draft 2026 Form W-2. It added a box 12 code of TP for the total amount of qualified tips reported. The challenge we’re going to see for employers with that coding is that, again, not all tips are necessarily qualifying or not everything that we consider tips would qualify as we were discussing service charges or involuntary tips would have to be excluded from that box because the employees are going to use the information reported on that W-2 in that box using that code for purposes of their deduction on the personal income tax return. So, the challenge there is going to be distinguishing between what qualifies, what doesn’t.
Additionally, the draft also added a box 14B, where employers will need to provide a two-digit tipped occupation code to identify the particular job of the individual that qualifies as being an occupation that is regularly and customarily tipped. So, these forms and this additional data will need to be provided to employees and filed with the Social Security Administration as is regularly done with W-2s or, and this is kind of, again, one of the challenges, if the information is incorrect, the employer may face incorrect information reporting return penalties.

Chris Hammond: Thank you, Mike, that’s very helpful. Let’s go ahead and switch gears over to taxes on overtime compensation. What does the OBBBA provide regarding overtime pay and taxes?

Mike Mahoney: So, with respect to the overtime pay, employees may deduct up to 12 and a half thousand dollars in qualified FLSA overtime. So, what we’re talking about when we’re thinking about FLSA overtime is time and a half for hours worked over 40 in a work week. Again, there’s a cap on the amount. So married couples filing jointly can deduct up to $25,000 per year. The same phase out thresholds apply as with the tips, again, only overtime required by the FLSA counts. So, employers need to be cautious as to what they classify as overtime perhaps under state laws like Daily Overtime in California or Voluntary Overtime Premiums that they may pay as a matter of policy. Those may not qualify unless it’s otherwise mandated by the FLSA. So again, the focus is hours over 40 in a work week, time and a half.

Scott DeLuca: Mike, let’s just focus in for a second on that 12 and a half thousand and the $25,000 amounts. Is it the overtime premium that is deductible or is it the entire amount of compensation that the employee receives for the overtime work?

Mike Mahoney: It is exclusively the premium, so it’s the 0.5x times their regular rate times the hours over 40.

Scott DeLuca: Helpful. Okay, that’s an important distinction. Do hospitality employers have any financial benefits tied to overtime?

Mike Mahoney: Not directly. The overtime deduction benefits the employees, again, this goes on their personal income tax return. However, correctly tracking and reporting the qualified overtime certainly preserves employee goodwill. It limits the payroll tax exposure for incorrect information, return penalties, and is otherwise a necessary step in order to be compliant with the One Big Beautiful Bill.

Scott DeLuca: How should hospitality employers adjust their payroll systems for 2025 and the next couple of years, keeping in mind now they’ve got to go back to the beginning of the year to satisfy these requirements?

Mike Mahoney: Yeah, so 2025 is a transition year. We are still awaiting guidance from the Treasury Department as well as the Internal Revenue Service on how qualifying overtime and qualifying tips should be reported for 2025. The statute itself provides that the Secretary of the Treasury is to provide a reasonable method for employers to approximate the qualifying amounts. And the IRS has issued somewhat informal guidance indicating that for 2025, there will be no changes to the Form W-2, and there will be no changes to the withholding methodology. Once we get beyond 2025, from a reporting and withholding perspective, again, we have the fields for tip reporting, we have a separate code for overtime reporting in box 12, that will be mandatory. We also have a Draft Form W-4 that has been released, so employees will be required to estimate the amount of qualifying tips and qualifying overtime that they anticipate receiving and the income tax withholding will then be adjusted by virtue of the amount of the anticipated deduction employees expect.
I think there are going to be challenges with that, because by its very nature, the amount of tips and the amount of overtime is not necessarily a static number. So, employers need to be cautious in communicating with employees on how they should estimate those fields for purposes of adjusting their withholding. Other things that employers need to do immediately or begin working with in their systems is separating FLSA overtime from any other premium pay. Again, we’re looking only at hours over 40 and only the 0.5 premium. Employers need to begin tracking and distinguishing between voluntary tips and mandatory service charges. And then I’d say finally, employers with tipped employees need to begin identifying the occupation and the code that would apply to those roles for purposes of reporting on W-2s for their tipped employees.

Chris Hammond: Mike, we were talking about some pretty significant changes to the way employees are paid for hospitality employers. What are some of the biggest compliance pitfalls that you’re seeing so far?

Mike Mahoney: It really is a handful that we’ve seen, and it goes back to the fact that this law was signed on July 4th with retroactive effect because systems were not built as of January 1st to distinguish between automatic gratuities for example, and voluntary gratuity. So, one of the pitfalls would be treating automatic gratuities as tips, right? They’re not, those remain fully taxable. Those should not be separately accounted for on the W-2 and box 12. Another example would be failing to update tip pool agreements to exclude non-tipped occupations. And then finally, ignoring the phase-out rules when explaining the benefit to highly paid employees, again, there’s some misconception or perhaps misreporting in the news that there are no tax on tips, and that’s again, a bit of a misnomer because there are phase-outs, it still remains subject to social security and Medicare. So we’ve seen some disconnect between employers and their employees.
I’d say on the overtime piece, what we’re seeing is overlooking regular rate errors that misstate FLSA overtime or again, not distinguishing between what is FLSA mandated over time and over time that’s paid as a matter of state law, a matter of a collective bargaining agreement or a matter of company policy, that is not necessarily at 0.5x of the regular rate of pay for hours and excess of 40.

Chris Hammond: Mike, is the longstanding FICA tip credit for employers going to be affected by this?

Mike Mahoney: Yes, and actually it’s in a good way. So, the One Big Beautiful Bill Act expanded the tip credit beyond the food and beverage industry to certain beauty service businesses, but that’s to say the mechanics for the tip credit remain exactly the same for restaurants, bars, and other hospitality industry businesses. Employers still calculate the credit on FICA taxes paid on tips that exceed the federal minimum wage.

Scott DeLuca: So, Mike, we’ve been talking all along about the One Big Beautiful Bill Act and its impact on federal taxes that employees will be paying. How do state taxes fit into this entire scheme?

Mike Mahoney: So, states have their own rules about what is considered taxable income. Some, and in fact, I’d say many conform to the federal definition of modified adjusted gross income, and they would therefore permit the deduction, but others do not. So, employers need to monitor state revenue department guidance and be prepared to separate the wage reporting for state purposes.

Scott DeLuca: What if an employer has already lowered income tax withholding on tips because employees intend to claim the deduction?

Mike Mahoney: So, this is really an issue for 2026. For 2025, the IRS has issued again that informal guidance via their website and via an email that was circulated to tax practitioners that said, “Withholding procedures for 2025 should remain unchanged.” The Draft Form W-4 for 2026, however, as I mentioned, does contain fields where employees will be able to estimate the amount of qualifying tips and qualifying overtime that they anticipate receiving, and that will flow through to the W-4 field, identifying the amount of deductions which will have the impact of reducing income tax withholding on a payroll by payroll basis.

Chris Hammond: Mike, what are three actions that employers can take this week in order to ensure that they are ready and that they’re in compliance with these changes?

Mike Mahoney: I think a lot of this is preparatory work and just ensuring a clean house. So, for example, you can run a tipped employee census and map current job titles to the preliminary IRS occupation codes. Another would be auditing FLSA classification and regular rate calculations to ensure only true overtime premium pay is tagged as qualified. And then I think it’s really about communication as well. Brief your finance, HR, and operations leaders on the upcoming Form W-2 changes, so that budgeting point of sale programming and employee communications can stay in sync. Again, I’d also suggest communicating with employees about the Form W-4 changes, so that they understand if they want to adjust the withholding on their qualifying tips or qualifying overtime, it requires action on their part.

Scott DeLuca: Mike, you’ve provided a lot of helpful guidance throughout today’s discussion. What do you think is on the horizon? Is there any reason to expect that there’s going to be even more changes to come?

Mike Mahoney: I do. I think we’re very much in the beginning of this. Again, the law was signed a little over two and a half months ago. When Treasury issued the proposed regulations on the tipped occupations, there’s a comment period that’s open until October 23rd, so I would suggest to anyone listening, if you’ve reviewed the proposed regulations and you have any comments, speak now, or forever hold your peace as they say. Upon conclusion of that comment period, the IRS is going to review the comments, and they may modify the regulation, and then we expect them to finalize the regulations so that there’s kind of solid guidance for employers to execute upon. We expect the Draft Form W-2 and the Draft Form W-4 to be finalized. There could be some potential adjustments made to those, though they seem to be fairly certain in what they’re wanting to do there. Again, industry associations and hospitality employers should consider commenting on these various forms and regulations so that they have a voice in shaping the final rules on how these businesses are to execute on the guidance.

Scott DeLuca: Mike, thank you so much for these important insights and helpful guidance for the no tax on tips and no tax on overtime provisions of the One Big Beautiful Bill Act. We truly appreciate your valuable time, and know that you’re going to continue to keep us updated with further changes to the extent the IRS makes further changes and when they finalize their regulations and the forms that you’ve mentioned today.
As I noted at the beginning of today’s podcast, this is the first of a new series, No Tax, No Problem for hospitality employers. The series is going to continue with additional podcasts focused on the no tax on tips and overtime provisions of the One Big Beautiful Bill Act, along with how those provisions are affected by and how they impact the state law provisions. We expect to share insights for this for Texas and California, Nevada, Florida, New York, and other states in the coming weeks. So please make sure you’re on the lookout for those podcasts. Also, as we get closer to the conclusion of 2025, we’re hopeful that we’ll be able to offer a webinar to share the final guidance from the IRS, the new forms that hopefully will be finalized before the end of the year and to help prepare hospitality employers with end-of-year compliance with the One Big Beautiful Bill Act and its no tax on tips and overtime provisions. Thank you for listening, and we will see you again soon.

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