The One Big Beautiful Bill Act (OBBBA) brings a major change to how restaurants and other tipped businesses handle payroll and taxes.
Starting January 1, 2025, both employers and employees will need to start tracking tips and overtime premiumsdifferently — and the IRS will expect documentation to match.
In this guide, you’ll learn what the 2025 tip and overtime deduction means, what to track, and how to stay compliant.
💡 What Is the 2025 Tip & Overtime Deduction?
Under the OBBBA, two new deductions allow employees to lower their taxable income:
- Qualified Tips: Up to $25,000 in voluntary tips per year
- Qualified Overtime Premiums: Up to $12,500 per employee, or $25,000 if married filing jointly
To qualify, everything must be properly reported and documented. That’s where restaurant owners come in — you’ll need accurate payroll tracking to protect both your team and your business.
✅ Quick note: These new deductions apply to income earned in 2025, and employers must start tracking from January 1, 2025.
🧾 Why Employers Must Start Tracking Now
Even though the IRS won’t require new W-2 boxes until 2026, restaurants should begin tracking qualified tips and overtime premiums right away.
Here’s what that means in practice:
- Separate voluntary tips from automatic service charges or banquet fees.
- Track the overtime premium (the “extra half” in time-and-a-half pay).
- Coordinate with your payroll provider to ensure systems can record these separately.
- Save documentation for every pay period.
You can reference the official IRS update here: IRS OBBBA overview.
👩🍳 Employee Responsibilities for 2025
Your staff also plays a key role in compliance. Encourage employees to:
- Keep a daily tip log showing only voluntary tips (cash, card, or digital).
- Save every paystub for 2025 — either digitally or in print.
- Ask payroll for a year-end summary of tips and overtime premiums.
- Keep all records through 2028 in case of audit.
These records help them qualify for their own OBBBA deductions and ensure your payroll reports match their documentation.
📂 The 2025–2026 Timeline at a Glance
| Date | Action |
|---|---|
| Jan 1, 2025 | Start tracking qualified tips and overtime separately |
| Late 2025 | IRS to release final W-2 instructions |
| Jan 2026 | Employers must use new W-2 boxes/codes for 2026 filings |
⚙️ How Restaurant Owners Can Prepare
Here’s your quick checklist for staying compliant and confident:
1. Talk to your payroll company
Ask if their system can separate voluntary tips (Qualified) and overtime premiums for 2025.
2. Update your tip policy
Clarify what counts as a voluntary tip vs. an automatic service charge.
3. Train your managers
Make sure shift leaders understand how to verify reported tips.
4. Educate your staff
Use the one-page employee guide I’ve created to make it easy to explain.
5. Keep records digital
Scan paystubs, tip logs, and summaries and store them securely for at least four years.
🖥️ Free Resources to Share
Download both one-page guides to make implementation easy:
👉 Employer Guide: 2025 Tip & Overtime Deduction Update
👉 Employee Guide: 2025 Tracking Responsibilities
For more compliance help, visit AskElise.com/resources.
About Elise Hebert
Accountant | AskElise.com
Helping business owners stay compliant, confident, and tax-ready.
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