Last month, I had the opportunity to host a webinar with my business friend, Edgar Ndjatou, on a topic that’s been getting a lot of attention lately: the No Tax on Tips and Overtime rule and what it could mean for employers heading into tax season.
There’s been plenty of buzz, some excitement, and—understandably—a fair bit of confusion. So let’s slow things down and walk through what this rule actually is, what we know so far, and what small business owners should be thinking about from a payroll and compliance standpoint.
What is the No Tax on Tips and Overtime Rule?
At a high level, this rule is designed to provide tax relief related to tips and overtime pay by allowing certain amounts to be excluded from federal income tax.
The goal?
✅ Increase take-home pay for employees
✅ Reduce payroll tax burdens
✅ Support industries where tips and overtime are common
This is especially relevant for businesses in industries like hospitality, food service, salons, and other tipped or hourly environments.
That said—this is not a blanket “no taxes ever” rule, and the details matter (a lot).
What Income Is Affected?
Under the proposed guidance discussed during the webinar:
Tips
- Limit of $25,000 per year
- Only for employees & eligible self-employed individuals in certain industries – like hospitality and personal services (the Treasury Department has issued the final list)
- Only allowed on reported tips
- “Phase-out” thresholds on individuals that make over $150,000/year or joint filers making over $300,000/year
Overtime wages:
- Limit of $12,500 per year
- Only applies to the “half-time” in time-and-a-half pay
- Does not include daily overtime required by state law or overtime in contracts or employer policies
- “Phase-out” thresholds on individuals that make over $150,000/year or joint filers making over $300,000/year
⚠️ Important notes:
- Even if income is excluded from income tax, it is still be subject to payroll taxes (Social Security and Medicare) unless further guidance says otherwise.
- 18 states are exploring similar exemptions, but currently, neither of these apply to State or Local income taxes
- This is a tax credit – regular federal income tax withholding will still be taken out of employee’s paychecks and they can claim the credit on their tax returns if they qualify.
This is where things can get tricky—and why proper payroll setup is critical.
Payroll Reporting Still Matters (A Lot)
One of the biggest takeaways from the webinar was this:
🧾 Just because something may not be taxable doesn’t mean it’s not reportable.
Employers are still expected to:
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Track tips accurately
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Calculate overtime correctly
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Maintain detailed payroll records
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Use compliant payroll systems
If your payroll isn’t set up properly—or if tips and overtime aren’t being tracked separately & accurately—it will be very difficult (or impossible) to apply this rule correctly.
What This Means for Small Business Owners
If you employ tipped or hourly workers, this rule could:
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Increase employee satisfaction and retention
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Reduce confusion around take-home pay
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Add complexity to payroll processing if systems aren’t aligned
But this isn’t something you want to “wait and see” on at the last minute.
Now is the time to:
✅ Review how tips and overtime are currently tracked
✅ Confirm your payroll software can handle these classifications
✅ Make sure your bookkeeping and payroll data match
✅ Stay informed as additional IRS guidance is released
A Word of Caution
As exciting as this rule sounds, it’s still evolving. There may be additional clarification, limitations, or reporting requirements issued before it’s fully implemented. It is also not permanent – it only applies for the tax years of 2025 to 2028 (unless it’s extended by another act of Congress).
This is not a DIY moment or a “TikTok tax hack.” Applying the rule incorrectly could lead to payroll errors, penalties, or amended filings down the road.
How We Can Help
At Details Matter Bookkeeping & Advisory, we help business owners:
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Set up payroll correctly from the start
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Stay compliant with changing payroll rules
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Ensure tips and overtime are tracked accurately
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Avoid surprises at tax time
If you’re unsure whether your current payroll process is ready for the No Tax on Tips and Overtime rule, let’s talk.
📅 Schedule a discovery call, and we’ll help you understand what this rule means for your specific business—and how to prepare with confidence. You can also learn more about our Payroll Services here.
Edgar Ndjatou is the Principal of Officium, LLC, a Washington, D.C.–based consulting firm that helps organizations navigate complex HR, employment law, and policy challenges. A Brandeis University alumnus and former employment attorney, Edgar brings more than a decade of experience advising businesses across public, private, and nonprofit sectors. He focuses on helping companies build strategic, compliant, and fair workplace policies that support both growth and culture.
Want to connect with Edgar? Visit officiumdc.com or connect on LinkedIn.