The H.R.1 Bill – also called the “One Big Beautiful Bill Act” – establishes an above-the-line tax deduction for “qualified tips” and “qualified overtime compensation”. Below are some highlights of what we know so far.
UPDATE ON TIPS: Only tips that are voluntary and “determined by the payor” qualify for exemption. Any tips charged by the business (such as an automatic gratuity for large groups at a restaurant) are not exempt.
Therefore, if your business does automatic charges like the example mentioned above, these should be itemized separately from other tips on employees’ checks. Within the program, a new wage type can be set up to keep these tips separate from voluntary tips. Click here for a video and instructions on setting up wage types.
No Tax on Tips
The H.R.1 bill establishes a new tax deduction of up to $25,000 for tips, subject to limitations.
Under the bill, the new tax deduction for tips is limited to cash tips (1) received by an employee during the course of employment in an occupation that customarily receives tips, and (2) reported by the employee to the employer for purposes of withholding payroll taxes. (Under current law, an employee is required to report tips exceeding $20 per month to their employer.)
Additionally, an employee with compensation exceeding a specified threshold ($160,000 in 2025 and adjusted annually for inflation) in the prior tax year may not claim the new tax deduction for tips.
No Tax on Overtime
This bill also allows a tax deduction for overtime compensation received by an individual, subject to income limitations, through 2029. The amount of the deduction may not exceed 20% of the individual’s regular wages from the same employer. Further, the deduction is not allowed for an individual with adjusted gross income exceeding $100,000 (or $150,000 for a head of the household and $200,000 for a married couple filing a joint return).
NOTE: For more specific details regarding the bill, please see the following pages on congress.gov and littler.com.
What Datatech Users Need to Know
As a result of the H.R.1 bill, there will be a new field on the W2 where an employee can claim the deduction on their income taxes when filing their tax return.
This bill will not affect employees’ withholding on their payroll checks. You will not need to change any of your current payroll processes within the software to comply with the new law.
Additionally, the bill does not affect any other taxes. The overtime amounts are based on federal law (40 hours/week), so it will not match overtime wages based on daily rules.
Once we have the 2025 W2 instructions, we will handle the necessary programming within the software to reflect these changes.