HR’s 2025 Compliance Survival Guide, Part 2 

Between rising payroll costs and shifting tax rules, employers are eager to uncover any opportunity to reduce liability—legally. The “One Big Beautiful Bill” (OBBB) introduced in 2025 offers new deduction opportunities tied to overtime and tipped wages, but they come with a tangle of conditions. 

This guide breaks down what’s actually deductible under the OBBB, what fine print employers are missing, and how to avoid common missteps. 

Overtime Tax Credits: What You Can Claim 

Under the OBBB, employers may deduct up to $12,500 (single) or $25,000 (joint) annually for overtime wages paid as required by the Fair Labor Standards Act (FLSA). 

Key Requirements: 

• Must be overtime pay mandated by the FLSA (not just extra hours or company policy) 

• Applies to the premium portion of OT only (i.e., the extra $10/hour if base is $20 and OT rate is $30) 

• Employee Social Security Number must be provided 

• Wages must be reported correctly on the W-2 

Common Pitfall: OT from state laws or company policy not tied to FLSA doesn’t qualify. 

Tip Income Deductions: What Counts (and What Doesn’t) 

Employers can now deduct up to $25,000 for tip income, but the rules are stricter than you might expect. 

What Qualifies: 

• Cash tips that are customarily and regularly received 

• Jobs that will appear on a forthcoming IRS list of qualifying occupations 

• Reported tips that include an employee’s Social Security Number 

• Tips are properly recorded and included on the W-2 

What Does Not Qualify: 

• Service charges (these are considered wages, not tips) 

• Tips above income limits ($150k single / $300k joint) 

• Unreported or cash-under-the-table earnings 

Important: No double-dipping. You can’t claim both an overtime and a tip deduction for the same wages. 

Documentation is Everything 

These deductions are valuable, but they require airtight documentation. 

What You Need: 

• Accurate W-2s showing breakdowns of OT and tips 

• Payroll records clearly indicating FLSA OT vs. company policy OT 

• Employee SSNs on file 

• Systems for capturing and reporting tips consistently 

If you’re audited or reviewed, missing documentation could nullify the deduction—or worse, trigger penalties. 

What Employers Should Do Now: 

• Review your payroll setup: Are OT and tips correctly categorized? 

• Confirm your W-2 format aligns with deduction reporting needs 

• Identify which roles and earnings may qualify for deductions 

• Educate managers on the proper classification of hours and tips 

MP Can Help:

Our team can walk through your payroll configuration and help ensure you’re set up to claim every dollar legally available. The savings can be significant—but only if your systems are set up right. 

✅ Want to find out if you qualify for 2025 OT and tip deductions?

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