What Employers Need to Know for Tax Years 2025 through 2028
By Charles Peery, CPA | Business Tax Practice Leader
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The One Big Beautiful Bill Act (OBBBA) introduces new federal reporting rules for businesses that employ tipped workers or overtime eligible staff. Effective for tax years 2025 through 2028, these changes emphasize wage transparency without drastically altering enforcement or eligibility rules. Instead, employers are expected to meet new documentation standards, especially for tip income and overtime premium pay. This article outlines the key provisions and best practices to help your business stay compliant and prepared.
- Annual Tip Reporting Requirements
The OBBBA enhances annual wage reporting required for tipped employees but does not mandate real time or per pay period submissions.
Key changes include:
- Employers must report the total qualified tips received by each employee on Form W-2, along with their qualifying occupation.
- Qualified tip income includes cash tips, credit card tips, and pooled tips that are voluntary and customary.
- Mandatory gratuities and service charges are not included.
- The existing rule that employees must report all tips to employers by the tenth of the following month remains in place.
- No changes were made to existing federal rules on tip pooling.
- A new deduction allows employees to exclude up to 25,000 dollars of qualified tip income annually. The deduction begins to phaseout once modified adjusted gross income exceeds 150,000 dollars for single filers and 300,000 dollars for joint filers.
- Workers may claim the deduction regardless of whether they itemize deductions or claim the standard deduction.
Strategic takeaway: Ensure your payroll system supports detailed end of year tip tracking and that your employees understand their responsibilities.
- Best Practices for Verifying Tip Income
- Keep detailed records: Encourage employees to log tips daily and keep employer copies of all reports for at least four years after the tax deadline.
- Participate in IRS tip agreements: Consider agreements such as TRDA, TRAC, or GITCA for added compliance support.
- Train employees: Provide training on tip policies and include written guidance in your employee handbook.
- Use technology: Electronic tracking tools can help automate reporting and provide tax summaries for employees.
- Overtime Reporting for a New Deduction
Although the OBBBA does not change who qualifies for overtime under federal law, it does introduce a new deduction for the premium portion of qualified overtime pay.
Key provisions include:
- Only the additional half time pay required by federal law qualifies.
- State mandated or contract-based overtime does not qualify.
- Employers must report qualified overtime premium pay separately on Form W-2.
- Employees can deduct up to $12,500 individually or $25,000 jointly. The deduction phases out for single filers with MAGI over $150,000 and joint filers with MAGI over $300,000.
- The overtime deduction is available to both itemizers and nonitemizers.
- No additional enforcement, attestation, or documentation mandates have been introduced.
Strategic takeaway: Your payroll system must be able to isolate and report the qualifying overtime premium amounts accurately.
- Best Practices for Overtime Pay Documentation
- Implement reliable time tracking: Use time clocks or software that accurately captures hours, breaks, and overtime.
- Separate overtime premium pay: Payroll systems should be configured to track the extra half time pay separately for reporting.
- Retain supporting documents: Maintain records of timecards, payroll reports, and communication regarding compliance. Assign responsibilities clearly between departments to improve oversight.
- IRS Compliance and Internal Controls
Participating in IRS tip programs like TRDA, TRAC, or GITCA can reduce audit risk and help demonstrate good faith compliance. Employers in these programs are required to submit annual reports on tip income and hours worked.
Strategic takeaway: Establish strong internal controls and update your policies and procedures to align with OBBBA standards.
Schedule a Consultation
Now is the time to assess your payroll systems and reporting practices. Schedule a consultation with your ATA advisor to prepare for the 2025 reporting season and reduce the risk of penalties. Our team can help you stay compliant and confident under the new law.