Article contributed by Aprio
If you work in hospitality, retail, or construction, the One Big Beautiful Bill (OBBB) introduces new tax rules that could significantly affect both paychecks and day-to-day business operations. The legislation has drawn particular attention to its treatment of tips and overtime pay, which have long been central issues in these industries.
On July 4, 2025, President Trump signed into law the OBBB, an array of tax changes affecting both individual and business taxpayers, effective as early as 2025. Some provisions extend existing policies and make them permanent, while others introduce entirely new rules and regulations. Many details remain unclear and will depend on forthcoming guidance from the Treasury Department, but several provisions are already in effect.
Key Provisions for Hospitality, Retail, and Construction
Two of the most closely watched changes are the “No Tax on Tips” and “No Tax on Overtime” provisions, which apply for tax years 2025 through 2028.
For individual taxpayers, both provisions share certain features:
- Individuals may claim the deductions regardless of whether they itemize.
- Income limitations apply.
- The maximum deduction is assessed per tax return, not per taxpayer. For example, if a married couple both have qualified tips, the maximum deduction on their joint return would be $25,000, not $50,000.
To claim the deduction, married taxpayers must file their taxes jointly. For businesses, the changes bring new administrative responsibilities, including:
- Accounting and tracking of the deductions.
- Additional reporting requirements and compliance obligations.
Because the legislation leaves much to be defined, employers and payroll providers will need to closely follow Treasury guidance to determine exactly what qualifies as a “tip” or “overtime compensation.” The Treasury Secretary has 90 days from enactment—until early October 2025—to issue further clarification.
Defining Qualified Tips & Their Implications
Qualified tips are defined as those voluntarily paid in cash or charged. To prevent abuse, the provision specifies that only occupations that customarily received tips prior to December 31, 2024, are eligible for this benefit. A Treasury-issued list of qualifying occupations is expected this fall, leaving open questions about whether newer tipping models—such as app-based delivery services—will be included.
Employers and employees both retain reporting obligations:
- Employees must track tips daily and report them to employers, who in turn maintain records and withhold appropriate taxes. Treasury is expected to update withholding tables in 2026.
- Employers are responsible for compliance with payroll tax returns and employee tax forms. While many rely on payroll companies, oversight and reasonable compliance efforts will remain essential.
The OBBB does not yet spell out penalties for noncompliance. However, existing penalty structures for payroll reporting suggest that consequences could be significant, ranging from $60 per incorrect Form W-2 to multimillion-dollar aggregate penalties for larger
employers.
Tax Credits for Tips
The deduction for qualified tips has both employee and employer implications. For workers, it effectively boosts take-home pay. For employers, it may provide an incentive to foster service environments where tipping is more likely; however, the provision aims to ease tax burdens rather than alter customer behavior.
In addition, the OBBB expands the employer credit for Social Security taxes paid on tips to include the beauty industry, a change likely to benefit salons, spas, and similar businesses.
What Qualified Overtime Means for Business
Qualified overtime compensation refers to the amount paid in excess of the regular hourly rate. For instance, if the regular rate is $20 per hour and overtime is $30, the qualified overtime compensation is $10. Employers must report this qualified overtime on employee tax forms (e.g., W-2s) so workers can claim the deduction if eligible.
The provision could shift workforce dynamics. Some employees may be motivated to take on additional hours, which could affect scheduling, payroll costs, and staffing models. Businesses may need to weigh the financial and cultural trade-offs between hiring new staff and increasing overtime for current employees.
The Bottom Line
These provisions are temporary, scheduled to sunset after 2028. They introduce potential benefits for employees but also create new compliance hurdles and uncertainties for businesses, especially given the short timeline for the Treasury to clarify details. Industry groups, employers, and workers will need to monitor developments closely in the months ahead.
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Authors:
John Rose, J.D., is Aprio’s National Tax Director in the Professional Practice Group, where he provides guidance on federal tax policy and complex compliance matters.
Sam Tuck, CPA, MTX, is a National Tax Co-Leader and Tax Partner at Aprio, advising clients on federal and state tax strategies across multiple industries.
Jeffrey Gershen, CPA, is a National Tax Co-Leader and Tax Partner at Aprio, with experience addressing the technical and practical implications of evolving tax legislation.
Dana Zukofsky is Managing Director of Aprio’s Restaurant, Franchise & Hospitality Practice, working with hospitality leaders on operational, financial, and tax challenges.
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