OBBB Overtime Tips and 1099 Changes
Tax season is upon us again and this year brings a lot of meaningful changes thanks to the One Big Beautiful Bill signed into law on July 4th, 2025. I know this has been addressed in previous articles, but I believe it is worth reiterating and diving deeper into some of the changes that affect businesses and individuals.
One of those big changes is the no-tax-on-overtime portion of the bill. Below are some key points to know.
1. This goes into effect for earnings as of 01/01/2025 and will end after 2028.
2. This deduction also phases out for high-income earners; the phase-out begins at $150,000 for single filer and $300,000 for joint filers.
3. This only applies to the additional monies paid out above the regular base hourly rate. For instance, if you make $15.00/hour and you’re paid time and half for overtime for an overtime hourly rate of $22.50, you can only claim the extra $7.50/hour. What’s important to understand here is that you, the employee, will be responsible for calculating how much of your wages you are allowed to claim as a deduction. Your employer is not required to break that extra 50% pay onto a separate line item, though some do, nor will it be in a separate box on your W-2. The information can only be found on the last paycheck you receive for the year.
4. The maximum deduction allowed is $12,500 for single filers and $25,000 for joint filers.
5. Your employer will still withhold taxes on this income; this is not an exemption to paying taxes on overtime, it is a deduction after the fact.
6. As with many IRS rules, there are exceptions to this one.
The other big change is no tax on tips. I’ve outlined a brief rundown of that below.
1. This also goes into effect 01/01/205 and will end after 2028
2. The maximum deduction is $25,000 and also phases out at the same limits as overtime stated above.
3. For self-employed individuals that receive tips, you will need to keep a log of what portion of your income is from services and what portion is from tips.
From the employer aspect, as of right now, there are no requirements for you to change the handling of overtime and tips for payroll reporting purposes. You may choose to create a new payroll line item to break out the additional “premium” overtime pay above the base hourly pay rate, but it is your choice.
Finally, the 1099-NEC reporting limit for payments made after 12/31/2025 has been increased from $600 to $2,000. This is a very significant change and affects business owners and independent contractors all over the country. This limit has now been tied to inflation so we will see changes to it every year moving forward. Since the IRS now requires electronic filing for 10 or more of all 1099s and W-2s combined, this new limit could save countless hours and expenses.
As always, please check with a tax professional if you have any questions, because every situation is unique.
With the tax deadline approaching, having a knowledgeable bookkeeper during the previous tax year means you can spend less time gathering data and forms and less stress on the outcome. A good bookkeeper complements a good accountant. When you’re ready for a good bookkeeper, contact Tammy at American Southwest Bookkeeping: 520-300-1805 or tammy@aswbookkeeping.com.
