One Big Beautiful Bill Act, Part 1: Deductions for Tipped Wages, Overtime Breaks, and the New Fringe Benefits Playbook

Stephanie Vasconcellos

Welcome to our “Employment and Benefits Unpacked” series, where we dive into the many employment benefits and mobility issues facing employers around the world. Each episode is hosted by a different Mayor Brown lawyer from our Global Employment and Benefits Group, and we hope to offer fresh perspectives and insights for employers, HR professionals, and in-house counsel. I’m Stephanie Vasconcellos, a partner in our Chicago office, and I’m delighted to be joined today by Ryan Liebl and Hillary August, both partners in our Chicago offices.

Hillary and Ryan, thanks for joining me. And today we’re here for the first part of our series on the One Big Beautiful Bill Act and its impact on benefits. As our listeners probably know, the One Big Beautiful Bill Act was signed into law on July 4th, 2025. It contained a lot of provisions. This wasn’t just a benefits law. It affected individual and business income taxes, the debt ceiling,

Stephanie Vasconcellos

spending on military and border security, and health care, not only in the benefits realm, but also individual entitlements, but also had numerous provisions that affect benefits, executive compensation, and employers and plan sponsors. So we’d like to spend a little time talking about those today and in the next couple of episodes of our series. So with that, I’ll turn it over to Hillary August, who will kick us off by talking about some of the new deductions under the One Big Beautiful Bill Act.

Hillary August

Thank you so much Stephanie. So as Stephanie mentioned, I’ll cover some of the deductions under the One Big Beautiful Bill Act. The first one is one of the most talked-about provisions in the One Big Beautiful Bill Act and that was what’s known as the No Tax on Tips provision. I think this is somewhat of a misnomer because it is actually an above-the-line deduction on tipped income. So that means it’s an adjustment to income. A taxpayer can subtract the tips earned up to a certain threshold from their gross income in order to calculate their adjusted gross income on which their taxes will actually be calculated. This is going to be a new Section 224 to the Internal Revenue Code. And, very importantly, this provision is only applicable from 2025 through 2028. So remains to be seen whether Congress will extend the provision after 2028, but as of now it is scheduled to phase out in three years. But for these three years, employees receiving a W-2 or a self-employed individual who receives a 1099 can deduct what’s called a qualified tip. What is a qualified tip? The statute says that a qualified tip is a cash tip that’s received in an occupation which customarily and regularly receive tips on or before December 31, 2024, subject to certain exceptions and as provided by the Secretary of the Treasury. So that timing provision is important because it was intended to curb people from all of a sudden saying, I should be able to deduct all this money from tips, for example, or as tips. For example, lawyers don’t earn tips. So if all of a sudden they started trying to deduct quite a bit from their income saying that it was qualified as a tip, that would not fly under the new bill. The Treasury Department then published proposed regulations on September 22, 2025. So before the shutdown, that defines what actually constitutes a qualified tip, and also includes the list of professions that the Treasury Department deemed as being ones that received tips customarily before December 31 of 2024. To determine if a payment is a qualified tip, the following factors are taken into account. So first, qualified tips have to be paid in cash or an equivalent medium, like a check, or a credit card, a debit card, a gift card, something like a tangible or intangible token that’s readily exchangeable for a fixed amount in cash, or some other form of electronic settlement or mobile application. So that’s important, know a lot. I don’t carry cash around anymore. I know a lot of people don’t. I pay for things on my phone using Apple Pay. If you give a tip using Apple Pay, that would count as a tip that could be deducted under the One Big Beautiful Bill Act. Qualified tips have to be received from customers or in the case of an employee, it could be received through a mandatory or voluntary tip sharing agreement like a tip pool. So if you, for example, go to a restaurant where tips that are given to all of the wait staff are pooled and distributed among the employees, then each employee who receives a share of the tip pool will be able to deduct that share from his or her income. Qualified tips also have to be paid voluntarily by a customer and can’t be subject to negotiation. And qualified tips also don’t include certain service charges. For example, we’ve seen some restaurants that impose an automatic 5%, 10%, 18% service charge, for if you have a large party or some restaurants are saying we impose this charge to cover the cost of healthcare. If the tip is mandatory, then the service charge is not deductible as a tip under the One Big Beautiful Bill Act.

Stephanie Vasconcellos

So I wonder if that will change some of the practices that restaurants have had. I know that we saw that kind of automatic gratuity start to be added more and I’m not sure, I think in some restaurants it’s mandatory, I think in some it’s like this is on the bill unless you ask for it to be removed. But I wonder if the ability to deduct tips only if they’re voluntary will see kind of an industry change so that you don’t see this automatic tip so much anymore because you’ve got staff who want to take those tips and be able to take that deduction.

Hillary August

I think that’s a really good question. And I do think that if a restaurant has a tip that is applied, but patrons can ask to have the tip removed. So in essence, it is a voluntary tip that would be something that could be deducted from gross income, but it would be interesting to see how restaurants are responding to this and whether or not they get rid of these automatic charges and decide to roll the dice on whether or not a patron will end up leaving a tip.

Ryan Liebl

One quick question, Hillary, before, well, at least I still like that occurred to me too, any corresponding disadvantages? Does it still count as comp for purposes of benefit plans? Does it still things like that? And I think, know, FICA and Social Security, does it count for wages earned still and things like that? So it’s only an advantage or are there corresponding disadvantages that should be considered if it’s, if it, the employee takes this and doesn’t pay tax on it?

Hillary August

Yeah, I think there could be corresponding disadvantages. So, for example, if you have a 401(k) plan and the definition of compensation excludes tips and all of a sudden, because of the way a restaurant changes its pay structure in response to the One Big Beautiful Bill Act, wait staff and other employees are receiving a larger portion of their pay as tips, that would bring down the amount of their compensation for purposes of the 401(k) plan. So that could also bring down their corresponding contributions to the 401(k) plan and also could bring down matches to the 401(k) plan. So that’s an important point to think about whether or not this is going to have any other sort of downstream effects on employee benefit plans. And one other important note is any amount that is received for an illegal activity or a prostitution service or some sort of pornographic activity does not count as a qualified tip. But the Treasury Department did publish a whole set of occupation codes that would qualify as occupations that do regularly involve tips. So, generally, the proposed regulations group these occupations into eight categories. The first one is beverage and food service, like we’ve been talking about. So tips to people like bartenders, waitstaff, other food workers, dishwashers. Category two is tips for entertainment and events. So these are tips that are going to gambling dealers, other people involved in gambling, performers, DJs who come perform at a wedding or a quinceañera or a bar mitzvah, but not radio DJs. Digital content creators like social media influencers to the extent that they receive tips. Category three is hospitality and guest services. So people who work at hotels such as bellhops and concierges. Category four is home services. Anyone who comes into your home to fix something or a pair worker, a landscaper, a plumber, electrician, cleaning or service workers. Category five is personal services. So these are people who provide other services in the home, like a house sitter, an elderly companion. It also includes private events staff, so party planners, wedding videographers, funeral celebrants, tutors, nannies, and babysitters. Category six is personal appearance and wellness. So these are facialists, masseuses, hairdressers, tattoo artists, shoe shiners, and tailors. Category seven includes recreation and instruction. So this would include golf caddies. This would include people like helicopter tour pilots, museum guides, cruise directors, and ski instructors. These are actually occupations that are written into the Treasury Department’s proposed regulations.

Stephanie Vasconcellos

It’s really so much more broad than I would have thought about. When I first heard about the deduction for tips, I was thinking that it was primarily restaurant-focused. And when you start going through the different categories, everyone makes sense, but I’m surprised each time you say a new one.

Hillary August

I know, so category eight is transportation and delivery, and it includes rickshaw drivers and water taxi operators, and then shuttle drivers, parking and valet attendants and movers. So it is interesting. It’s a pretty expansive list. And one other thing that could be interesting is you wonder if this is actually going to lead to people reporting even more income to the extent that people previously weren’t reporting tips as income. That could be another interesting effect of this provision. A few other key points. One is, the maximum annual deduction for this is $25,000, but the deduction cannot exceed someone’s income. Someone can take the deduction, whether they itemize or take a standard deduction on their taxes. And the deduction is reduced by $100 for each $1,000 by which the taxpayer’s modified adjusted gross income or EGI exceeds $150,000 or $300,000 for joint filers. What you need to remember about this is if you’re someone who actually is making a substantial income, then your deduction will be phased out as your income grows. The way the math works out is that for a single taxpayer who wants to claim the maximum $25,000 deduction, the deduction would phase out to zero once the taxpayer has earned $400,000 of modified AGI. And for a married couple claiming the maximum, the deduction would phase out to zero when they reach $550,000 of AGI. And one very important point that Ryan alluded to earlier, which is that this only applies to federal income taxes. But this does not apply to social security taxes and Medicare taxes, so FICA taxes. This doesn’t apply to payroll taxes, state taxes. So all of that income still does need to be taxed that can otherwise be deducted for purposes of this no tax on tips provision. All of that income.

Stephanie Vasconcellos

So this is going to be a real system change. Like, payroll administrators are going to have to be on top of this to make sure they’re funneling things into the appropriate category, taxing what should be taxed, and then making sure there’s an exemption to federal.

Hillary August

Yeah, this is a complicated provision to implement, especially considering that as of now, it’s only enforced for three years. So query whether this is really going to get much traction in the real world, because it is going to be very complicated for employers and for employees and for payroll services. Employers need to do things like they’re going to need to report on a W-2 the total amount of cash and non-cash tips reported by an employee and the occupation of the employee. This all is going to have to go onto a new form W-2. If 1099s are issued, tips have to be separately designated with the person’s occupation on the 1099. And these reporting requirements extend to third-party settlement organizations. So that’s what we typically think about as gig economy employers. And so these companies will have to report the portion of the payments that were made as reasonably designated by payers as cash tips, along with the occupation of the person receiving the tip.

Ryan Liebl

And one quick thought, sorry, I was just going to jump in. I think you note, Hillary, which is a good thought that people may currently or employers may currently allow a lot of tips to just sort of flow without reporting them. But we, of course, as tax attorneys, don’t condone that it should be reported now, too. But for any employers that have employees in this large, it occurs to me it’s worth a conversation about the fact that it would increase their FICA wages which could be helpful to them later in life if they get more credit for wages for purposes of FICA. So while they’re not paying federal taxes, if employers don’t currently do that, it may be worth having the conversation, should we come up with a system where we’re accurately capturing and taxing tips so that the employees get a bigger FICA credit for having paid more into the FICA system for later in life and then during these years where they wouldn’t pay federal taxes. So at least worth considering for employers that have large employee numbers in this group. Like, should we think about how we’re doing this for their benefit?

Hillary August

Right. Right. I think that’s a really good point.

Stephanie Vasconcellos

I was going to say you’ve got similar issues between there’s this deduction for tips and then there’s the new deduction for overtime compensation as well, right? So you run into some of the same administrative problems, the same technical issues where you’ve got the deduction at the federal level, but I think it’s still subject to FICA and state taxes.

Hillary August

Exactly. As to this, new, the no tax on overtime is actually similar to the tips. It’s really just a deduction. And again, it’s also only effective 2025 to 2028. And you still have the rules that you still have to pay FICA taxes. You still have to pay payroll taxes. Any other state taxes will still apply to that income. So a lot of the same rules that do apply to the so-called no tax on tips apply to the no tax on overtime. Also, even though this really is just a, it’s a tax deduction, it’s not a no-tax provision. So this provision applies to overtime pay that is required by the Fair Labor Standards Act or the FLSA. This only applies to the premium portion above an employee’s regular rate of pay. So it’s the half of the time and a half. So if you have a worker who normally earns $20 an hour and then receives $30 an hour in overtime, the worker can deduct $10, which is the difference between normal rate of pay and the overtime rate of pay. Similar to the no tax on tips provision, the deduction limit here is $12,500 for a taxpayer who files as a single payer or $25,000 for a joint return. And again, like with tax on tips, the deduction is reduced by $100 for each $1,000 for which a taxpayer’s AGI exceeds $150,000 or $300,000 on a joint return. And it does appear that to the extent that overtime is required due to a state law, as opposed to the FLSA. So a law like in Alaska or California or Colorado or Nevada that have laws about daily overtime requirements or to the extent that overtime is due because of something else like a collective bargaining agreement, that overtime would not qualify for this tax deduction. It’s really only tax deductions. It’s only overtime that is paid due to the FLSA. So what should employers do now? So with regard to the no tax on tips, employers, importantly, in 2025, need to continue actually withholding tax on tips. This will theoretically change for 2026 because the One Big Beautiful Bill Act does direct the Secretary of the Treasury to publish new rules for years starting after 12/31 of 25. But for now, employers do need to continue to withhold taxes on tips. Employers also should be educating employees and managing expectations, make sure employees understand that mandatory service charges aren’t tips. Employers, as we’ve discussed, should also consider if they want to go ahead and change some of their business practices. So getting rid of a mandatory service charge in lieu of voluntary tips. And then, as Stephanie mentioned, employers really have to look at their payroll and their reporting systems to figure out, they actually separate out the tips from wages? And will they be able to help employees in calculating their deductions? And with regard to the no tax on overtime, there are a lot of similar questions that employers will need to answer. Will they be able to separate out the overtime? Can their payroll vendors handle this? And will their payroll vendors be able to report correctly on the W-2? Also the same withholding rules for this year. So for 2025, employers paying overtime still do need to deduct tax on overtime. And then there’s a really difficult question for this no tax on overtime issue, which is should employers reclassify workers so that workers who are currently exempt would transition to non-exempt roles so that they would be paid overtime. This is a really difficult call because there are a lot of effects of doing so. So first, the law does expire in three years. It’s possible Congress could extend it, but that’s unclear. But this definitely will place even more of a focus on how employees are being classified because the law encourages employees who are non-exempt to work overtime. Reclassifying employees as non-exempt could mean more flexibility for employers to control payroll costs by reducing employees’ work hours when they’re not needed. But on the other hand, perhaps employees who were exempt and moved to non-exempt could see the reclassification as a demotion. Or maybe they would be giving up other perks of their exempt status and other employee benefits that are offered to exempt employees, but not non-exempt employees. And it would also add a burden on employers to track additional work hours of previously exempt employees.

And finally, predicting overtime needs can be a challenge. So unanticipated overtime could mean that it’s more costly for employers if they transition employees from exempt to non-exempt. And conversely, newly non-exempt employees who don’t end up working overtime hours could see a loss in income. So there are still lot of questions.

Stephanie Vasconcellos

Yeah, any sort of transition is worth discussing with your employment council to determine whether it makes sense for the particular facts and circumstances. Because I know there’s a lot that goes into the exempt and non-exempt classification. And this is just one of those factors.

Hillary August

Luckily, the IRS has come out with penalty relief for the tax year 2025 with regard to the no tax on tips and no tax on overtime provisions in the One Big Beautiful Bill Act. As I mentioned, there are some new W-2 and 1099 reporting requirements under both of those provisions, but the IRS has acknowledged that the employers might not be able to provide all the information that they need to for 2025. And so employers and other payers will not face any penalties for failing to provide any separate accounting of amounts that are designated as cash tips or for qualified overtime compensation. And this is just for 2025. And so starting in 2026, all the forms will be updated and any tips or overtime paid for 2026 going forward will need to be reported correctly. The IRS also noted that although it’s not a requirement to receive the penalty relief, it does encourage employers and other payers to provide employees and payees, particularly those with a tipped occupation, with their occupation codes and the separate accounting of their cash tips. So the employee or the payee will have an easier time claiming the deduction for 2025.

Hillary August

Yeah. So Stephanie, I will turn it back over to you now to discuss other provisions of the One Big Beautiful Bill Act.

Stephanie Vasconcellos

So before we wrap up for the day, we’ll just go through a few of the miscellaneous fringe benefit changes that were also implemented under the One Big Beautiful Bill Act. And the first was a change for qualified bicycle commuting benefit reimbursements. You may not have heard about these in a while. These were originally added to the code in 2009, and they provided for a $20 a month reimbursement for qualified bicycle commuting expenses. That ability to get that $20 a month reimbursement on a tax-favorite basis was suspended under the Tax Cuts and Jobs Act of 2017, and the suspension was effective through 2025.

Now the One Big Beautiful Bill Act makes that suspension permanent. So the program was officially terminated for tax years beginning in 2026. Similarly, employer-paid moving expenses were excluded from income until that Tax Cuts and Jobs Act of 2017. The exclusion was suspended at that point, running through 2025. The One Big Beautiful Bill Act makes that suspension permanent for tax years beginning on and after December 31, 2025, with a couple of exceptions. One is for members of the US Armed Forces who are on active duty, are moving pursuant to a military order and incident to a permanent change of station, so long as their expenses would otherwise qualify as a deduction if the employee was not reimbursed. But otherwise, kind of the status quo, the employer-paid moving expenses will no longer be excluded from income. And then the last one I wanted to add in before we wrap up this session, is educational assistance programs. This is a benefit you actually often see employers and employee use are these tuition reimbursement programs. These fall under 127 of the code and they were enacted in 1978 to provide at the time a temporary exclusion for employers to provide tuition reimbursement on a tax-free basis. Temporary relief was eventually made permanent, not until 2012. But one of the things that’s unusual is it’s been almost 40 years since the amount has changed. The amount is $5,250 that’s allowed to be paid by employers on a tax-free basis. Now what will be happening is that will be inflation-adjusted effective January 1, 2026. So we’ll finally see that amount, which was put in place in 1986, at the time it covered a year’s worth of tuition, books and boarding, it will start to inflation-adjust going forward. Any other comments or questions, Ryan or Hillary, or should we wrap up for this session?

Ryan Liebl

Not for me, I think that’s good, yeah.

Stephanie Vasconcellos

No. All right, well, Ryan and Hillary, thanks again for joining me today. It’s been great to do our first session on the One Big Beautiful Bill Act, and we hope you’ll join us for our subsequent sessions where we’ll talk about some health and welfare plan changes and some executive compensation plan changes. For our viewers and listeners, there are more episodes to come. Please check out our Employment and Benefits Unpacked page on the Mayer Brown website or on your preferred streaming cloud.

Stephanie Vasconcellos

If you’d like to discuss any of the issues that we’ve covered here today, please get in touch. Until next time, thank you for joining us.