No Tax on Tips and Overtime: What Trump’s OBBB Means for Hospitality, Retail, and Construction

At a glance

• The main takeaway: The One Big Beautiful Bill (OBBB) introduces temporary federal tax deductions for qualified tips and overtime pay, significantly impacting both employees and employers through 2028.
• Impact on you: If you earn tips or overtime — or manage employees who do — you’ll need to understand new deduction rules, reporting requirements, and compliance responsibilities starting in the 2025 tax year.
• Next steps: Aprio’s tax advisors are proactively monitoring tax legislation developments and are prepared to help you navigate the potential changes.

Schedule a consultation

The full story:

On July 4, 2025, President Trump signed into effect the One Big Beautiful Bill (OBBB), introducing an array of tax changes that will impact individual and entity taxpayers for tax years starting as early as 2025. Some provisions were extended and made permanent while others were completely new. Many of the changes include layers of complexity that require careful analysis, as well as a level of patience as more guidance from the Secretary of the Treasury will be needed.

Key Provisions for Hospitality, Retail, and Construction

There are several provisions that affect the hospitality, construction, retail, and manufacturing industries — “No Tax on Tips” and “No Tax on Overtime.” Both provisions are now in effect for the 2025 tax year and will last until the 2028 tax year.  

These two provisions have a few similarities as they pertain to individual income tax implications, including:

• Individuals can take the deduction regardless of whether they itemize or not.
• Both provisions are subject to income limitations.
• The maximum deductions are assessed per tax return, not per taxpayer. For example, if a married couple both have qualified tips, the maximum deduction on their joint tax return would be $25,000 not $50,000. If the taxpayers are married, they must file jointly to receive the benefit of the deductions. 

For businesses, these provisions will create an array of administrative responsibilities including:

• Accounting and tracking of the deductions
• Additional reporting requirements and tax compliance.

It will require a comprehensive understanding of what will qualify as a “tip” and “overtime compensation” as outlined in the new provisions. The Bill states in both sections that the Secretary of the Treasury has 90 days from the date of enactment to release further guidance. However, based on the information we have now, the planning can begin immediately.

Defining Qualified Tips & Their Implications

Qualified tips are those voluntarily paid in cash or charged. In a presumed effort to prevent abuse, the new provision explicitly states that tips must be for occupations who have customarily received tips prior to December 31, 2024. According to the OBBB, the Secretary of the Treasury is to release a list of occupations no later than 90 days after the Bill’s enactment, presumably October 2, 2025.

After the COVID-19 pandemic in 2020, hybrid hospitality models, ranging from various delivery services to food takeout, saw an uptick in tipping. Due to the recent nature of the increase in these types of tipping models, it remains uncertain whether they will be included in the category of occupations who have customarily received tips.      

Employers and employees alike have specific responsibilities as it pertains to tips. Both should continue tracking tips in a similar manner to what has been done previously.

• Employees must track their tips daily and report them to their employer, and the employer retains those records while withholding the appropriate taxes. The Secretary of the Treasury is expected to update the withholding tables in 2026.
• Employers have compliance responsibilities for payroll tax returns and employee tax forms. While payroll companies are expected to handle these filings, it is imperative that employers oversee their compliance. Employers should make a reasonable effort to comply with these reporting standards by way of a reasonable method to be specified by the Secretary of the Treasury.  

The OBBB did not provide details for penalties if companies fail to comply with this additional reporting requirement. One can presume they would fall under the penalty guidelines for information reporting. For example, if an employer fails to provide an employee with the correct Form W-2, the penalty starts at $60 per filing plus interest with the maximum penalty in the millions of dollars.

Tax Credits for Tips

The deduction for qualified tips serves as an opportunity for employers and employees. Employers might facilitate an environment to ethically encourage employees to provide an elevated quality of service that would warrant a higher tip. This would result in employers having an increase in their tax credits and employees having an increase in take-home pay.

In conjunction with this, businesses in the beauty industry will see an additional benefit, as the employer credit for social security taxes paid on tips has expanded to include the beauty industry.

What Qualified Overtime Means for Your Business

Qualified overtime compensation refers to the amount paid in excess of the regular hourly rate. For example, if the regular rate is $20 per hour and the overtime rate is $30 per hour, the qualified overtime compensation is $10 ($30 minus $20). Employers should continue tracking overtime as usual but must now report any qualified overtime on the appropriate tax forms for employees (e.g., W-2s). This reporting is necessary for employees to claim the deduction on their tax returns, provided they meet the provision’s requirements.

With this new provision, employers should recognize that existing employees might be incentivized to increase their work hours. This change will have a direct impact on the company’s scheduling, staffing needs, cash flow, and the potential hiring of new employees. Human Resources policies related to overtime protocols and company morale will need to be reviewed and updated or perhaps implemented if they do not exist. Employers will need to carefully evaluate the economics of their company, considering the cost of hiring someone new versus the benefit of retaining an existing employee.

The bottom line

While it is important to emphasize that these provisions are temporary and are scheduled to expire in 2028, they also bring financial implications, administrative obligations, and layers of uncertainty at the federal and state level.

Aprio’s tax advisors are continuously monitoring legislative developments and will be working with our State and Local Tax team to guide you and your business through transitions. To dive deeper into the new legislation, please visit our One Big Beautiful Bill Hub for the latest news.