Major Federal Tax Law Changes: What Employers and Employees Need to Know
A new federal law, enacted on July 4, 2025, is making waves for U.S. workers and employers by introducing two key tax deductions – one for tip income and another for overtime compensation. Stelios Payroll has reviewed the initial guidance and is sharing essential recommendations to help businesses and employees take full advantage of these changes.
1. New Tip Income Deduction (Up to $25,000!)
What’s New?
Deduction Amount: Up to $25,000 in tip income per year may now be excluded from federal income tax.
Retroactive Application: This deduction applies to tips earned in 2025.
Other Taxes Still Apply: Social Security, Medicare (7.65%), and state withholding still apply.
Who Qualifies? Eligible occupations (servers, barbers, etc.) will be announced soon by the U.S. Treasury.
Important: Workers must have valid Social Security numbers.
Stelios Payroll’s Tip:
Claim this as an above-the-line deduction on your 2025 federal tax return (Form 1040). No changes to payroll withholding should be made at this time.
2. Overtime Income Deduction: Save Up to $12,500 ($25,000 for Joint Filers)
What’s New?
Deduction Amount: Deduct up to $12,500 per individual (or $25,000 if filing jointly) in qualified overtime compensation.
Eligibility: Only FLSA-mandated overtime premiums qualify (like time-and-a-half for hours over 40/week).
Exclusions: State-specific or contractual overtime (e.g., California’s daily rules) do not qualify.
How Much Can Be Deducted? Only the premium portion is deductible.
Example: If regular pay is $20/hr, only the extra $10/hr overtime premium is deductible—not the full $30/hr.
Stelios Payroll’s Tip:
As with tip income, employees should claim this deduction on their 2025 tax return. No changes to payroll withholding are recommended.
Next Steps: What Stelios Payroll Clients Should Do
No Immediate Payroll Changes: We will not implement any payroll or tax software changes until the IRS and Treasury provide formal guidance.
Share with Your Team: Employers are encouraged to inform employees about these new deductions.
Wait Before Changing W-4 Forms: Any changes to your W-4 should wait until at least 2026.
Consult Your Tax Advisor: For personalized advice, employees should reach out to their tax advisors.
Stay Updated with Stelios Payroll
Stelios Payroll is committed to keeping our clients ahead of the curve. We’ll provide updates as the IRS and Treasury release more information. For questions, contact our office or your tax advisor.
Contact Us:
📞 (608) 274-7473
📍 34 Schroeder Ct. Ste 200, Madison, WI 53711
Trust Stelios Payroll for proactive, reliable payroll and tax compliance solutions. Stay tuned for further updates as more guidance becomes available!
