No Tax on Tips: OnTheClock Payroll Is Here to Help!

Key Takeaways:

• ✔Employees can deduct up to $25,000 in qualified tips and $12,500 in federally required overtime pay on their federal tax return.
• ✔Payroll taxes are still withheld during the year, the deductions apply only at tax filing time.
• ✔Employers must maintain accurate payroll records and ensure W-2s now show detailed tip and overtime information.
• ✔OnTheClock Payroll automates tip tracking, overtime calculations, and year-end tax documentation to stay compliant.

On July 4, a new federal law was enacted, changing how tip income and overtime pay are taxed. If you run a business in the hospitality, service, or retail industry, this ruling will drastically impact your employees and business.

The headlines were bold: “No Tax on Tips.” And while the spirit of the law is good news for employees, the reality for employers is a bit more complicated. You’re still responsible for payroll tax withholding, accurate reporting, and year-end documentation — and now, there are even more boxes to check.

Luckily, you’re not alone. OnTheClock Payroll is already set up to support you through these changes, keeping your payroll process clean, compliant, and stress-free.

Let’s break down what this law really means — and how we’re helping you navigate it.

The One Big Beautiful Bill Act’s Impact on Overtime and Tips

The One Big Beautiful Bill Act introduced two new federal tax deductions for employees starting in the 2025 tax year. These deductions won’t impact weekly paychecks, but they will change how income is reported and taxed when employees file their returns.

Tip Income Deduction

Under the new law, employees can deduct up to $25,000 in qualified tips from their federal taxable income at year’s end.

This includes:

• Tips received in industries where tipping was customary before 2025;
• Tips paid in cash, by credit card, or shared through tip pooling; and
• Tips properly reported through payroll.

Overtime Pay Deduction

Employees can also deduct up to $12,500 of overtime — but only if it’s federally required.

Here’s what qualifies:

• Overtime pay that meets FLSA (Fair Labor Standards Act) criteria;
• Standard 1.5x pay after 40 hours per week; and
• No deductions for overtime based on state-specific or unique company policies.
  
  
  

Important Note: These are year-end deductions, not paycheck boosts. Payroll taxes are still withheld like normal. The benefit only shows up when employees file their federal returns.

How Will No Taxes on Tips Affect My Paycheck?

At first glance, these changes might seem like a tax season issue — something for your employees and their accountants to worry about. But the truth is, employers play a big role in making it work.

Companies are now responsible for providing more detailed payroll records and ensuring that tip and overtime data is correctly reported on year-end forms.

And that’s exactly where OnTheClock Payroll comes in.

How Can OnTheClock Payroll Help You Stay Compliant?

We know tax law isn’t something most small business owners want to think about — especially when you’re focused on keeping shifts covered, employees happy, and customers satisfied.

That’s why we’ve built the tools to handle the complexity for you.

You Track the Time and Tips — We Handle the Rest

Your team enters tips. You approve them. OnTheClock handles everything else.

• Employees can manually enter or confirm their tip totals;
• You can review and approve tips before running payroll; and
• Overtime is calculated automatically based on federal law.

W-2s With All the Right Details

The IRS now requires employers to break out qualified tip income and federal overtime on W-2s. With OnTheClock Payroll, that data is automatically pulled from your payroll history and included on each form.

Each W-2 includes:

• Total qualified tips for the year;
• Total FLSA-eligible overtime pay; and
• Job classification to confirm eligibility.

With OnTheClock, you won’t have to run special reports or create custom summaries — it’s all built in.

Guardrails to Keep You on Track

Worried about misclassifying employees or making a reporting mistake? We’ve got you covered there, too.

• Tip-eligible jobs are limited to those approved by the U.S. Treasury;
• Only federally defined overtime is counted toward deductions; and
• Any unusual payroll behavior — like reclassifying employees mid-year — triggers a warning.

These features help you stay on the right side of compliance without having to become a tax expert.

What Aspects Will Remain the Same?

It’s important to be aware that this new law will not change everything. 

• You still withhold payroll taxes from tips and overtime like normal;
• Employees must still report all their income, including cash tips; and
• You don’t need to calculate the actual deductions — that’s on the employees and their tax preparers.

Your job is to track time and pay correctly. OnTheClock will ensure your records are ready for tax season.

What You Can Do Right Now to Prepare for the No Tax on Tips Law?

If you’re managing a team in food service, hospitality, or retail, here are a few smart steps to take:

1. Encourage full tip reporting. Even cash tips should be entered.
2. Use time tracking for overtime accuracy. Let OnTheClock automate employees’ time calculations.
3. Turn on tip tracking in your OnTheClock account.
4. Run payroll through OnTheClock Payroll to ensure W-2s are accurate and compliant.
5. Stay informed. We’ll keep updating our platform as federal agencies release more guidance.

Stay Focused on Running Your Business — We’ll Handle Payroll

Tax law changes are never simple, especially when they impact employee pay. But the good news is that with OnTheClock Payroll, you don’t have to figure it all out yourself.

We’re already preparing for the new requirements, so you don’t have to stress over year-end reporting or last-minute rule changes.

Start your free trial of OnTheClock Payroll today and see how easy it is to stay compliant, even when the rules change.