For U.S. businesses and employee readers • What to do now for 2025 payroll and how it affects individual taxpayers at filing time
Quick Take — 2025 rules vs. what’s new for workers
- Keep 2025 payroll unchanged: The IRS kept withholding tables and core forms as-is for 2025 (use Pub. 15 & 15-T). No special table changes for OBBBA this year.
- New deductions for workers (file-time): OBBBA created above-the-line deductions starting in 2025 for qualified tips and qualified overtime premiums. These are claimed on the individual’s tax return—not through 2025 payroll tables.
- Employer reporting stays standard: Continue standard W-2 reporting of wages and tips, Form 8027 for large food/beverage establishments, and consider the FICA tip credit on Form 8846 where eligible.
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1) What OBBBA changed vs. what employers do in 2025
New for individuals (file-time)
- Tips deduction: Eligible workers may deduct up to a statutory cap of qualified cash/charged tips (income limits apply).
- Overtime deduction: Eligible workers may deduct the overtime premium portion (the “half” in time-and-a-half), subject to caps and income phase-outs.
- These deductions are taken on the individual return; payroll withholding methods remain 2025-standard.
Employer action (payroll-time)
- Use 2025 Pub. 15 / 15-T methods; withhold/collect FICA on reported tips as usual.
- Continue standard W-2 reporting (Boxes 1, 5 include tip income; Box 7 Social Security tips; Box 8 allocated tips where applicable).
- File Form 8027 if you’re a large food/beverage establishment; evaluate Form 8846 (FICA tip credit).
2) Tips in 2025: payroll, W-2 boxes & annual Form 8027
W-2 reporting (key boxes)
- Box 1: Wages, tips, other compensation (includes reported tips).
- Box 5: Medicare wages and tips (includes reported tips).
- Box 7: Social Security tips reported to the employer.
- Box 8: Allocated tips (for large food/beverage establishments).
Form 8027 (annual)
- Required for large food or beverage establishments (tipping customary; on-premises consumption; staffing thresholds).
- Used to report receipts and tips and to determine allocated tips.
- Paper due by late Feb; e-file by Mar 31 (check current-year instructions).
Employer obligations on tips
- Retain employee tip reports; withhold income tax & employee FICA on reported tips when funds are available; pay employer FICA on tips.
- Educate employees on daily tip records (Pub. 1244/Pub. 531).
- Consider TRAC/TRDA or the proposed SITCA program for technology-based compliance.
FICA tip credit (Form 8846)
- Food/beverage employers may claim a general business credit for employer FICA taxes paid on employees’ tips.
- Attach Form 8846; coordinate with Form 3800; follow the $5.15 minimum-wage rule embedded in credit computations.
3) Overtime in 2025: payroll rules & employee deduction
- Payroll mechanics unchanged in 2025: Overtime pay is taxable wages subject to withholding and FICA as usual.
- New employee deduction (file-time): Workers may deduct qualified overtime premiums (overtime paid under FLSA §7 that exceeds the regular rate), subject to statutory caps and phase-outs.
- Best practice: Track overtime premiums separately in your system (earnings code) so employees can easily substantiate deductions at tax time.
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4) 2025 Payroll/HR compliance checklist
A. System & policy
- Confirm you’re using 2025 Pub. 15 / 15-T methods for withholding.
- Enable separate earning codes for overtime premium and for reported tips.
- Refresh tip-reporting policy; require monthly (or more frequent) tip statements.
B. W-2 year-end controls
- Map tips to Boxes 1, 5, 7; allocate tips to Box 8 where Form 8027 requires.
- Run W-2 draft checks for tipped staff (Box 7 ≠ $0 where tips are reported).
- Prepare employee communications on 2025 deductions (tips/overtime) for tax filing.
C. Forms & credits
- Determine if you are a large food/beverage establishment and calendar Form 8027 deadlines.
- Evaluate eligibility for the FICA tip credit (Form 8846) and coordinate with tax.
- Monitor IRS 2026 updates to forms/instructions impacting tips and overtime.
5) Data to capture: fields & logs
| Data element | Why it matters | Where it’s used |
|---|---|---|
| Reported cash/charged tips (by pay period & YTD) | Determines income/FICA, W-2 Boxes 1/5/7; support 8027 & any allocated tips | Payroll register, W-2, Form 8027 |
| Allocated tips (if applicable) | Required for large food/bev establishments when reported tips fall below thresholds | W-2 Box 8, Form 8027 |
| Overtime premium dollars (separate from base) | Helps employees substantiate the new overtime deduction | Employee year-end pay detail; HR portal |
| Daily tip logs / POS-captured tips | Audit trail if IRS inquires; supports FICA tip credit | Internal records; potential TRAC/TRDA/SITCA participation |
6) Employee-facing notes (share in onboarding & year-end)
- Tips: Report all tips to the employer; if you miss reporting, you may owe FICA via Form 4137 when filing your 1040.
- Overtime: You may be eligible for a new deduction on the overtime premium portion—keep your pay stubs; ask payroll for a year-end overtime premium total.
- W-4: Use the IRS Tax Withholding Estimator if your tips or overtime vary to avoid under- or over-withholding.
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7) FAQs
Do we change 2025 withholding because of OBBBA?
No. 2025 withholding tables and core forms remain standard. Employees claim any new deductions on their returns.
Are allocated tips subject to withholding?
Allocated tips (W-2 Box 8) aren’t subject to withholding at year-end, but employees must include them in income and may owe FICA (Form 4137) if not previously collected.
How should we track overtime for the new deduction?
Use a distinct earnings code for the premium portion of overtime so employees can document the deduction on their tax return.
This guide summarizes IRS employer reporting rules for 2025 and the new worker deductions effective in 2025 under OBBBA, as of August 16, 2025. It’s general information—not legal or tax advice. Confirm state law and monitor IRS releases for 2026 form/instruction changes.
