Payroll Alerts - Tips and Overtime Taxes

A new law signed on July 4, 2025, introduces significant tax relief for employees who earn tips or qualified overtime pay. At Candoor Payroll, we’ve reviewed the early details and are sharing the key takeaways to help employers and employees understand what this means.

What’s Changing?

The law exempts certain earnings from federal income tax, beginning with the 2025 tax year. These changes apply to two areas: tips and qualified overtime compensation.

Tips

📌 Up to $25,000 in tips per year can be deducted from federal taxable wages on your return
📌 Social Security and Medicare (7.65%) taxes and state withholding still apply
📌 Applies retroactively for all tips earned during 2025
📌 A list of eligible occupations (e.g., servers, barbers) will be published by the Treasury
📌 Employees must have valid Social Security numbers to claim the deduction
📌 Candoor recommends using the above-the-line deduction on your 2025 return—no changes to current withholding are recommended at this time

Overtime

🧭 Employees can deduct up to $12,500 in “qualified overtime compensation”
🧭 Joint filers can deduct up to $25,000
🧭 Only FLSA-required overtime counts (e.g., time-and-a-half pay after 40 hours/week)
🧭 State- or contract-based OT rules (such as California’s daily OT) do not qualify
🧭 Only the premium portion is deductible—for example, if you earn $20/hour normally, the $10/hour OT premium is what qualifies
🧭 Candoor recommends applying this as a deduction at tax filing and not adjusting W-4s yet

What Should You Do Now?

Until the IRS and Treasury issue official guidance, we recommend clients and employees hold off on changing any tax withholding or payroll settings. Instead, take advantage of the deductions when filing your 2025 tax return, and revisit adjustments in 2026 if needed.

As always, Candoor Payroll will keep you updated as more information becomes available.

Have questions or need personalized guidance? Contact Us — we’re here to help.