Learn how the new No Tax on Tips and No Tax on Overtime rules affect your restaurant’s 2025 filings, what to track in payroll, and how to guide your team.
If you run a restaurant, 2025 will look different for your front- and back-of-house teams.
New federal rules around No Tax on Tips and No Tax on Overtime are designed to give employees meaningful tax relief on income that’s core to the way restaurants operate. But in order for your people to benefit, you need to have tip reporting, overtime tracking, and W-2 reporting dialed in.
This guide recaps the key points from our webinar with CBIZ managing directors Patrick O’Reilly and Jeff Pera, and breaks down what restaurant operators should do before filing 2025 returns.
CBIZ is one of the nation’s largest providers of tax, accounting, and advisory services, working with thousands of businesses across industries, including a significant footprint in food and beverage. Their specialists advise restaurant operators on year-end tax strategy, payroll compliance, credits and incentives, entity structuring, and multi-state requirements. With more than 30 years of experience each, Patrick and Jeff help operators translate complex legislation into practical steps that reduce risk, improve reporting accuracy, and create meaningful tax savings. Their expertise shaped the guidance shared in this post.
Disclaimer: This post is for general information only and isn’t tax advice. Always work with your CPA or tax advisor on your specific situation.
Before the new rules, tips were fully taxable for both employees and employers, subject to Social Security, Medicare, and all the usual employment taxes.
Under the new provision (effective January 1, 2025, and retroactive to 2025):
The key: Only reported tips that flow through payroll and land on the W-2 are eligible.
That includes:
If the tip never hits your system, it’s not going to help the employee at tax time.
Overtime is typically more of a back-of-house driver in restaurants, but the new rules create a similar opportunity:
The nuance Patrick and Jeff emphasized, is that overtime deduction applies to the premium portion only, not the whole overtime wage.
Example:
Only that extra $5/hour counts toward the overtime deduction cap.
They also suggested a practical shortcut many employees will use for 2025:
One of the most important messages from the webinar is that for employers, there is no change in the way you tax tips or overtime.
You still:
Where it does change for you:
For employees to claim No Tax on Tips, you must be able to show clearly what tips they earned and reported. That means:
You’ll also want to review your tip structures.
If you’re unsure, Patrick’s advice was simple: talk to your CPA, your payroll provider, or your state restaurant association.
On the overtime side, the main operational ask is clear separation and tracking:
Patrick recommended being prepared to help employees use their final pay stub to identify total overtime earnings for the year, since that will be the starting point for calculating their deduction.
If you have more than one location, this part is critical.
If an employee works at two or more locations under common ownership, regulators may treat that as one employer for overtime purposes.
Example:
From a wage-and-hour perspective, that can be viewed as 60 total hours with one employer, and overtime would typically be owed.
If your systems aren’t consolidating hours across locations, you risk:
If employees are moving between different states, and/or separate legal entities with different payroll tax IDs, the W-2 and overtime treatment gets more complex and very jurisdiction-specific.
That’s a “call your CPA” situation, but at minimum:
The No Tax on Tips and No Tax on Overtime provisions are federal rules.
Some states may choose to conform (follow the same rules). Others may not.
What that means practically:
Jeff and Patrick’s advice:
The IRS is expected to roll out a new W-4 for 2026, with updates that account for:
What that means for operators:
Best practices Patrick and Jeff suggested:
You don’t need to turn into a tax advisor, but you do need a communication plan.
Expect questions like:
On tips:
“Your tips still run through payroll as taxable wages. The new law gives you a deduction on your personal return for up to $25,000 of the tip income that shows on your W-2.”
On overtime:
“The extra portion of overtime pay, above your regular rate, may be deductible on your personal tax return, up to $12,500. Save your last pay stub of the year so you or your tax preparer can see your total overtime earnings.”
On W-4s:
“The IRS is updating the W-4 form to reflect new rules and inflation. Filling out the new version helps make sure the right amount of tax is withheld from your paycheck.”
And then, always:
The common thread throughout this session was clear: restaurants need clean, connected data to stay compliant and to help employees take advantage of these new 2025 tax provisions.
To support your teams without adding manual work, operators need systems that can:
Fourth helps restaurant operators bring all of this together.
By connecting scheduling, time & attendance, and payroll, we help you:
If you’re looking to strengthen your HR and payroll processes, or want us to introduce you to our partners at CBIZ for deeper tax-specific guidance, talk to us.
Your employees work hard for their tips and overtime pay. The right systems ensure they receive the full benefit, while keeping your operation efficient and compliant.
Otherwise, you can watch the on-demand webinar to hear experts from CBIZ walk through these updates in detail.
Christina Lau (Host, Fourth)
Thank you. Hey everyone, welcome to our webinar today. I’m Christina with the Fourth team, and I will be your host. I am happy to see everyone joining us for this year-end tax readiness webinar.
So before we get started shortly here—I’m seeing some more people getting signed on—I’ll go over our housekeeping items.
First is that the session is being recorded. We will share the recording and the slide deck with you after the webinar.
Second, if you’re joining us live today and you have any questions during the session at any point, you can drop them into the Q&A box on your screen, and we will be taking those live towards the end. So you can just continue to drop those throughout the session.
So to get started, joining me today are managing directors from CBIZ, a national leader in tax and advisory services. We have Patrick O’Reilly and Jeff Pera.
We heard from them a few months ago when they joined us to go over our separate sessions on the No Tax on Tips Act, as well as the One Big Beautiful Bill breakdown for restaurant operators. They always do a super great job, as we’ve heard from you guys and from our audience, translating a lot of these technical updates into plain, simple language for the industry to understand.
So really excited and appreciate having you guys here with us today for this session.
Patrick and Jeff, could you take a few minutes and share with the audience what you do at CBIZ, a little bit of background, as well as just what CBIZ does in your own words?
Patrick O’Reilly (Speaker, CBIZ)
Sure, I’ll go first. I’m Patrick O’Reilly. I sit in the Portland, Maine office for CBIZ. I’m a managing director here, about 30 years in public accounting experience.
I work with a wide variety of F&B clients, all the way from farm-to-table, distributors, restaurants, retailers, bars, particularly with breweries and cannabis.
Jeff Pera (Speaker, CBIZ)
Thank you. And I’m Jeff Pera.
I focus on the tax side with about 30 years of experience as well, having seen companies from as large as Del Monte to as small as Rosie Sourdough. So I’ve seen just about everything, and my goal is to help clients save money and stay out of the state of compliance harm with the IRS.
Looking forward to doing this presentation with you.
Christina Lau (Host, Fourth)
Awesome. Thank you both.
So for today, we will be talking about these topics here—from 2025 filings to payroll, W-4s, how to communicate with your employees, IRS guidance—and then we’ll conclude with some recommendations and next steps and then take Q&A.
So we’ve got quite a packed agenda. Again, if you have questions during this presentation, you can ask those at any point.
Patrick and Jeff, I will hand it over to you guys to start with 2025 filing.
Jeff Pera (Speaker, CBIZ)
Perfect.
So we did do, as Christina mentioned, a webinar just on No Tax on Tips and No Tax on Overtime. I can’t recall—probably August, maybe sometime—and it should be available on the Fourth website. So this is just going to be an overview of what was on that.
If you missed that or would like to have some more information, I would recommend that you go back and listen to that full webinar on those two topics. But I’ll just go over it here for the year-end wrap-up.
So before January 1st, 2025—well, the effective date is January 1st, 2025; the legislation actually happened in July of 2025, but it was retroactive—tips were taxable for both employees and employers, with full Social Security, Medicare, so the typical employment and employee taxes.
Now the employer needs to somehow communicate, and the easiest way to do that is through the W-2 box for tips: what the reportable taxed tips were for that individual employee.
And that employee can then take and deduct up to $25,000 of the W-2-reported tip income annually from their personal taxes.
There’s no change for the employer other than maybe some additional record-keeping and reporting and some questions, which we’ll get into a little bit later.
So with tips, the key component here is: it has to be reported. So it can be cash tips, it can be credit card tips, it can be Venmo, it can be Zelle—however you receive the tip—as long as you are reporting it through your employer, it is being recorded through your paycheck that week and ultimately through your W-2 at year-end.
Those are the tips that will be able to be deducted.
Now we’ll get into, a little bit later, the nuances of that and how that might work mechanically and, you know, the changes that might be coming down the pike for 2026 and beyond.
This is a four-year provision. It’s set for ’25, ’26, ’27, and ’28.
I suspect it will be popular and will be continued after that, but that is the set of rules we have to work by for now.
Similarly with overtime—it’s typically more of a back-of-the-house thing in the restaurant industry, obviously—overtime was fully taxable and still is to a large degree.
Overtime that is reported and recorded accurately through your paychecks and pay stubs will be an additional deduction that you can take on your federal individual income tax return as an employee.
Once again, no changes for now really to the taxability or that tax deduction of these payments to the employer.
So up to $12,500 for an individual, or if you’re married filing joint, you can take up to $25,000 of overtime deductions.
I’ll get into a little bit later on how to quantify that and calculate it and how we think that most employees will have to come up with what that number is.
I think the OT component of your earnings needs to be separate.
So obviously it’s a record-keeping thing on the employer side. You should be doing this anyway because there’s wage-and-hour rules in every state, so you should be calculating that and be able to have that number available to share with your employees. And we’ll talk about that a little bit more later.
Okay, and now we’re talking a little bit about the One Big Beautiful Bill as it relates to some of the other pandemic-era tax credits.
Many of the pandemic-era tax credits had ended, and many of the new provisions within the One Big Beautiful Bill reinstate some of those.
Probably one of the biggest—and we’ll get to this in a little more detail—are the following: the deduction for bonus depreciation and qualified production property, things of that sort. We can get into those in a little bit more detail.
So restaurant operators, if they’re doing improvements before the end of the year, can take advantage of these enhanced deductions, as well as an enhanced interest expense limitation to the extent that they’re borrowing money to make those improvements.
The big one that I think is impacting a lot of the food and beverage companies, as well as some of the restaurant operators that are somewhat innovative in what they do, is the R&D expenses.
Prior to the Big Beautiful Bill, R&D expenses had to be capitalized—put up on a balance sheet—and then amortized over a five-year period.
Now all those expenses can be deducted currently.
So some of our clients are taking advantage of this by amending their ’23, ’24, and ’22 returns to take advantage of those expenses that were capitalized, and now we’re going ahead and amending those returns, taking the deduction, and in many cases creating tax refunds for our restaurant operators and other food and beverage companies.
So there is an opportunity to free up some cash that was paid in prior years.
I’m suggesting that you noodle on that with your CPA, or call one of us and we can help you through that as well, but it’s a big opportunity to take advantage of an aspect of the bill that creates more cash flow for you.
The FICA tips as well—it’s been expanded and aligns more with the No Tax on Tips, so we’ll get into that a little bit more as well.
Let me just go to the next slide here.
So this is a big one: it’s bonus depreciation and Section 179.
Prior to the One Big Beautiful Bill, only 60% of your qualified property could be written off in the year in which you placed it in service.
Today, as of January 19th, any property placed into service can be 100% expensed and deducted in the year in which you place it in service.
And that means just about any type of property you’re talking about that’s inside the restaurant or inside the physical space that you have.
So taking advantage of 100% deduction means, obviously, zero taxes to the extent that you have no other income.
It also means—and this is not really covered here in a lot of detail; it was covered in a prior presentation—but to the extent that you are incurring debt and incurring interest expense, the interest expense prior to the One Big Beautiful Bill was limited.
And it was limited to your income that was calculated by taking your depreciation into account. And if you had no income left after taking that depreciation, you couldn’t deduct the interest expense.
Now under the One Big Beautiful Bill—by the way, that’s a tongue twister; I think I need to come up with an acronym—now interest expense calculation can be deducted because you no longer need to use your depreciation in that income calculation.
So you remove that depreciation, you have a higher income for interest expense calculation purposes.
So not only do you get the 100% write-off on your equipment or other physical pieces of things that you put in the restaurant or your back office—whatever—but the interest expense now is no longer limited.
So it’s a double benefit.
You’re using leverage to create a tax deduction on the qualified property, and you’re also using the leverage to calculate the interest expense that also becomes a deduction.
So it’s a huge benefit, and we’re seeing a lot of restaurants right now increase their capex to take advantage of this before the end of the year.
The pass-through entity tax is another—let me just go one back to this.
This is a federal provision, the depreciation write-off. So to the extent that you operate in a state, the one thing I would caution you on is: as good as these federal rules are to stimulate the economy and stimulate investment in the restaurant or the food and beverage factory, whatever we’re talking about, you need to make sure that you check in with the states.
Because the states do have different alignment with the federal rules. Some have adopted these rules; many have not.
Whether they do or don’t is something you need to make sure that you’re taking note of before you file your returns or take advantage of what you think is a good deduction for your state in which you operate.
Just be cognizant enough to look at that in the context of your filing position.
Similarly with the pass-through entity tax: this is an ability to take the state taxes at the entity level and reduce the taxable income for LLCs, S-corps, partnerships, so that the income tax that the state otherwise would pass to the individuals is now deducted at the entity level, providing less income to be taxed at the shareholder or partner level.
In addition to that, the One Big Beautiful Bill has also increased the state and local tax deduction to $40,000 from $10,000.
And that’s a significant increase—other than probably blue states where property tax and income taxes already are going to eclipse that $40,000—but nonetheless, that’s a huge increase of $30,000 from the prior bill.
So this is an additional advantage that you can take care of.
And with the pass-through entity tax, I would say each state kind of deals with this differently, and some of you have probably already taken advantage of the pass-through entity tax. So just making sure that you are looking at the $40,000 SALT cap in the context of what the deduction at the entity level will provide you is something that you should look at between now and the end of the year.
The Work Opportunity Tax Credit and research and development, or research and experimentation credits, is another opportunity for you to take advantage of.
So as you staff up in your restaurant for the holiday season, to the extent that you’re doing that, the Work Opportunity Tax Credit gives you a tax credit for any new hire that meets the definition of certain unemployed individuals, SNAP recipients, things—people—of that sort, people who may be struggling.
The incentive is to hire these people, and the benefit to the operators is the tax credit that that provides to them.
The research and development, or research and experimentation credit, again, is for companies and operators that are strongly into innovation or creating new opportunities for what it is they’re making.
The R&D credit does apply. You can take advantage of it.
Many people think that it just applies to technology companies. I sit in the San Francisco area, and there are plenty of technology companies who take advantage of this, but I will tell you there’s also plenty of food and beverage companies that are also innovating with new textures or tastes or new ingredients that get to the final product that they’re trying to sell, either in the restaurant or on the store shelves.
In either case, those costs qualify—or can qualify—for a research and development tax credit.
And again, those expenses too will be deducted currently rather than capitalized and amortized over a five-year period.
Patrick, I’ll turn it over to you.
Patrick O’Reilly (Speaker, CBIZ)
Yeah. Just a little tip-in on the R&D or R&E credits also: it doesn’t necessarily have to be a menu item.
It can be a process or some type of efficiency or equipment that you’re utilizing in the space to make yourself more efficient or to make you more productive as well.
So it’s a pretty broad range of things that can qualify for that credit.
We have a team of experts here at CBIZ to help do the math to come up with what your deduction will be, and there are many, many states that have a similar credit as well.
So there are some changes: electronic filing mandate.
If you’re not electronically filing your quarterlies and W-2s and everything already anyway through Fourth or whatever accountant or payroll provider you’re using, it is pretty much mandatory.
So a combination of W-2s, 1099s, 941s, tax compliance filings—it’s pretty easy to get up to 250 forms for an organization, even with as little as, you know, 40 or 50 employees.
So that electronic filing mandate is really in full force now.
A couple of other things on there just to point out for you: the slides will be available for you to look at later as well.
So let’s jump into year-end.
One of the big questions that we get a lot, especially in January when people are filing their 1099s, is, you know, we’ll ask questions about, “What did this person do for you? Did they do this service for other people? Are they doing it exclusively for you?”
You know, look at the DOL website, go through the checklist—the Department of Labor website—look at the checklist, see if the person is in fact an employee by classification as opposed to an independent contractor.
You have a musician come in and play in your restaurant once a month or something like that—obviously they go do it other places, they’re using their own equipment or what have you—they’re most likely going to be an independent contractor.
If you have somebody that comes in, you know, 20 hours a week for you cleaning after hours, and they don’t really do it for other people, and you’re supplying them with all their equipment and everything like that, depending on the jurisdiction that you’re in, the state you’re in, you may have to kind of look at that and do a little bit more of an analysis.
So make sure you have people classified properly between 1099 contractors and employees. It matters for payroll, and it matters for workers’ compensation as well.
On who is eligible for overtime or not—the federal numbers are there.
Anything under $844 a week, which translates to a little under $44,000 annually, they’re technically exempt from overtime, and they’re probably not going to be eligible for overtime.
There are some rules, and those also vary by jurisdictions, particularly in—as Jeff said—some of the blue states have a little bit more restrictive rules around this, making people be an employee.
So they have to have management responsibilities, they have to be supervising other people, they have to have some type of authority—more than just, “Their salary is here, so therefore they’re not eligible for overtime anymore.”
If they’re under $844, or $44,000 a year, they’re not exempt from overtime, and they are going to be eligible. Pretty clear cut.
So the IRS kind of punted on 2025, frankly.
There’s a little bit of guidance that came out on the types of industries that are going to be eligible for tip reporting.
So it initially was really geared towards F&B, but they came out with a list of a lot of different people. You’ve probably seen the list; it goes down to ride share drivers—so your Uber and Lyfts—food delivery people, so like DoorDash drivers and things like that.
It also goes into some of the more traditional tipped things that have nothing to do with food and beverage—so nail salons, your hairdresser, masseuse, esthetician.
So there’s a whole bunch of other industries that are being swept up, I should say, into this No Tax on Tips legislation.
And it’s a pretty exhaustive list. If you want to go to the IRS website and look at it, it’s a pretty easy Google search.
If you are in that gig economy and you do get directly tipped, it’s a little bit more complicated on how a sole proprietor or a self-employed person or even a Schedule C filer is going to be reporting these tips through their wages to get that credit.
Hopefully we’ll get a little bit more guidance on that.
We are anticipating that for ’26 and beyond, the IRS is going to be coming out with some changes to the W-2 and maybe the 941, the W-4, which is where you declare what you’re going to have for withholdings and what have you.
We think that there’s probably going to be changes to the W-4. I think I saw a draft; I don’t think it’s final yet, where they are going to have a little bit less withholding for employees who are directly tipped, who are going to qualify for that $25,000 tip exemption and possibly the $12,500 overtime exemption.
Those folks filling out a W-4 that would make it so that their tax withholdings during the course of the year are going to take into account the fact that they will have some credit from those two activities—or one or both of those activities—when they file their 1040 at year-end.
Another thing on here: make sure to look at tip pooling and tip-sharing arrangements within your restaurant.
Make sure that they qualify for the tip deduction. Make sure that that number is flowing through to the right box on the W-2.
The webinar that we did previously—that I did previously, I think in the summertime—we went into that in quite a bit more detail and had a bunch of questions at the end about what was or wasn’t.
So basically anything that is a service charge, or a restaurant-level fee, is not going to be flowing through to anybody’s W-2 as a tip.
That’s restaurant earnings that may be split to employees through some type of bonus structure or something like that, but it would not be coded as tips.
So that service charge that is not customer-driven, or the customer isn’t making the decision on what that number will be—that would be not eligible for the program.
In 2026, they have come out with a new box-12 code. So this is the code where you see things like retirement plan contributions, certain other—maybe union fees, things like that. Box 12 and box 14 are used to catch also code “TT,” to show the qualified overtime earnings for employees in 2026.
And I’ll give you a tip in a little bit on how to maybe help you figure out what that number is going to be for 2025.
Service charges—I touched on this just a minute ago. The difference between tips and service charges: work with your CPA, work with your tax advisor to figure out—or maybe even your industry groups; if you have a restaurant association in the state, they usually have pretty good resources on—what is an employer-paid wage and what is a gratuity.
Overtime is typically time-and-a-half over 40 hours.
Some jurisdictions may have specific rules about when you have to pay overtime. Like it might be certain industries where there’s a day of the week, or it might be calculated on a day—hours worked in a day—as opposed to hours worked in a week.
So you just have to make sure you understand your local rules and your state. Your payroll provider should be very well versed in all of this and will be collecting the data from you and then applying the rules appropriately.
Multi-location employees: so if you have two different payrolls that you’re filing under one umbrella, and you have an employee working a certain number of hours at one location and a certain number of hours at another location, you have to be sure that, because it’s a common paymaster scheme—or even if it’s a consolidated group—that you are reporting their overtime accurately.
So you can’t send them to work, you know, 30 hours at one place and 30 hours at another place, where it’s all the same constructive ownership, and not pay that person overtime.
So you just have to be aware of those crossover people as well.
State and local minimum wage rules are changing. A lot of them increased this year. I think there’s going to be even more increasing going forward.
I know the city that I live in just had a citizen referendum to raise the minimum wage significantly, phased in over a number of years.
So you’re probably hearing about this. You’re probably hearing from your local chamber of commerce, who are typically in opposition for those measures because it makes that jurisdiction potentially less competitive.
But be aware of those minimum wage laws.
The split-shift premiums—all of those things are critical, and you need to be aware of what you have to do and be in compliance.
So it’s a little tough to read this, but the blue, darker-blue-shaded states are states that have a minimum wage that is higher than the federal minimum wage.
I can’t remember what year it was, but I think the federal minimum wage hasn’t changed in more than a decade. I think it’s been at $7.25 for quite a long time now.
So there’s very few states that are doing that.
And even if you are in a state that is compliant and is following the federal minimum wage and doesn’t have a state minimum wage or a municipality minimum wage that is higher than the federal minimum wage, to remain competitive in the employment realm you probably are paying more than that anyway.
So it’s definitely something that the market will drive, but you still need to be aware of what they are—especially if it’s a server. A lot of states have a server wage, so you can pay half of the prevailing minimum wage, and then you have to maybe catch them up if they have a bad day or a bad week or what have you, and they don’t get back to minimum wage with their tips.
Pretty unlikely, but it can happen, and you have to make that wage up.
So there are reporting requirements that you need to have, and typically POS and payroll systems will capture those, especially if you’re having punches being made for each shift.
So W-4 withholdings—I’m going to go through a lot of this stuff pretty quickly here. I want to make sure we leave some time for questions at the end.
There’s a great publication that talks about withholding methods and tables. It’s Publication 15-T from the IRS.
There’s a draft version of it for 2026 that’s out already on the IRS website that talks a bit about how they’re planning on making changes to affect the No Tax on Tips and No Tax on Overtime provisions that came out through the OBBB.
There’s going to be inflation adjustments to all of the tax brackets, so that’s coming out as well. They’re trying to put those so that they’re annually adjusted so that we don’t have bracket creep due to prevailing inflation.
The standard deduction—we talked about that; there’s going to be increases. Jeff talked about the tax, the local state and local tax portion of itemized deductions going from $10,000 to $40,000.
They’ve also made changes to the standard deduction.
Just a little side note: one of the unintended consequences of that—because I work with several nonprofits—is there were a lot of nonprofits worried that there’s going to be less contributions being made by people, with a higher standard deduction amount, meaning that you don’t have an additional tax benefit for charitable donations that you make unless you have a high state and local tax number.
So that’s TBD, I suppose—we’ll see how that all shakes out.
And we will have a new 2026 W-4.
I know a lot of people are still using the old, “How many exemptions do I have?”—all that type of stuff. The new W-4 has been out for several years now. It really doesn’t take deductions into account; it’s more: do you have a second job? Do you have a spouse who has a second job? Do you have any extenuating circumstances that are out of the normal? It’s pretty much table-driven at this point.
We are anticipating that they’re going to tweak the new W-4 further to include considerations for tipped and overtime pay.
So if we do have that change happening on the W-4 level, ostensibly what it would do typically is increase the take-home pay by having fewer withholdings and taxes being held from the paychecks, because they are going to have that credit to exclude some of that income when the employee actually goes to file their tax return.
So just kind of be prepared for that question coming up about why, after the new W-4 has come out, your employees have completed it, and the first few payrolls after you are filing with those new W-4 withholding rules—why their paycheck might look different.
Jeff Pera (Speaker, CBIZ)
And Patrick, let me just go back and say that I think going back to your earlier slide, it’s really important to characterize your employees correctly—whether they’re an independent contractor and they’re working 10 hours or 15 hours, or if they’re really employees.
Because to the extent that they’re misclassified, the employer will be penalized for not having withheld the employer share of certain taxes.
So it’s really important to make sure that these categorizations are done at the state level, because the state levels will drive the categorization.
So please make sure that you’re categorizing these employees or these workers the right way to make sure that you keep yourself out of trouble.
Patrick O’Reilly (Speaker, CBIZ)
Right. Great point.
And a lot of times there’s no recovery of that from anybody—that’s just an additional expense to the company.
So review the W-4s. Make sure employees are filling a new one out if something happens in their life—marriage, birth of a child, a dependent timing out.
If they have a child that has gone past the age limit—that’s 26th, I think—so they wouldn’t be considered a dependent on their return anymore.
Just stay on top of that.
You don’t necessarily have to go to the step to have an employee fill out a new W-4 every calendar year, but certainly I think for 2026 it might make sense to have them do that, particularly if they receive tips or overtime. Probably a best practice, I would say.
So what are we waiting for from the IRS?
The new W-4—we’ve talked about that—that is certainly coming.
I suppose there’s going to be further clarification on the tip income issue for compliance. There’s probably going to be a change to the 941 and the 8027, which is the annual form that you should all be filling out if you have directly tipped employees in your organization.
They may make some changes regarding multi-unit operators and reporting methods there.
But I think in the next, you know, five or six months we will have some additional answers from the IRS, now that the government is hopefully opening back up here shortly and the IRS will be gearing up for the new filing season coming up.
So some key deadlines to take a peek at—once again, you can go back and look through these slides afterwards.
Likewise, IRS.gov is actually a great source of information.
You know, when you’re doing your Google searches and typing in your tax questions, don’t take the AI-generated response that you get. I think that they’re mostly wrong, especially if it’s something as new as OBBB and the tax provisions that came out this year.
So this is a key thing: how are you going to communicate all this to your employees?
You may not have people who have a dad as an accountant or a spouse as an accountant or something like that on your staff to answer those questions, so you’re probably going to be fielding a bunch of questions.
“What’s happening? Why is my paycheck a little bit different? Why do I have to fill out a W-4 again? I did one when I got hired two years ago.”
Talk to them about the changes.
I don’t think that you’re going to want to get stuck in the trap of helping them fill out their 1040s, and they might not want to share all that information with you, but make them aware that the tips that they report that flow through their W-2 are going to show up in a box on their W-2 that they can then take and apply to the 1040 when they file.
The other thing—and I think I have it in a later slide, but I’ll talk about it now—on the overtime piece: the best method for 2025, since there is no call-out on the W-2 with that code “TT” in box 12 that they’re going to use for ’26 and beyond, would be to take their last pay stub of the year.
I’m assuming that if somebody makes $10 an hour and they work an hour of overtime, there’s going to be an OT line there that’s going to have $15 in it, right?
The only portion of that—that $10 plus $5—that is eligible for the No Tax on Overtime is the $5. So it’s just the amount above your straight-time pay that is eligible for that $12,500 deduction.
So I think you take your overtime earnings and then take a third of that, assuming everybody’s at time-and-a-half. So a third of that would be the overtime component, and that’s what you would use as a reduction on your 1040.
Just be prepared for these questions: “Why was this a change? Why do I have to update my W-4? What’s going to happen?
“With the No Tax on Tips, why is that on my W-2? Why is it in box 1 of my W-2? I thought I wasn’t supposed to pay tax on that.”
You know, you’re going to get those questions, so just be prepared.
Keep it simple. Explain to them very basically how it is: take this box for your tips—that’s going to be that deduction. Look at your last pay stub for your overtime earnings, and one-third of that number is going to be your deduction for the overtime.
I haven’t seen the draft 1040 yet to see how this is all going to take place, but I suspect that it’s going to be a below-the-line deduction.
So you’re going to have your federal adjusted gross income, and then there’s going to be an adjustment on the federal return for that.
On the state tax returns, if you live in a state that starts with the federal adjusted gross income, then that state would have to opt in to No Tax on Tips or No Tax on Overtime to give you a place to have a subtraction adjustment to take that out.
Some states start with the federal taxable income, not the adjusted gross income. That might be a lower number because you’ve already taken the No Tax on Tips / No Tax on Overtime adjustment out.
So it really depends on the jurisdiction that you’re in, how that’s going to shake out.
This is just some additional things to think about for the end of the year—a kind of summary checklist for you guys as a takeaway.
And with that, I think we can lead into the questions, Christina.
Christina Lau (Host, Fourth)
Excellent. Thank you so much, Patrick and Jeff. Again, lots of super great information that you both just went over.
You’ve heard from both of them today—there’s a lot you can do to prepare and to get ahead of tax season. But if you find yourself needing some extra support, you can reach out to Fourth to see how we can help you with your HR and payroll guidance, as well as leaning on CBIZ for any guidance or specific questions about your business.
So now, time for Q&A. We’ll be taking these from the audience. There are a couple that have been coming through, so just pulling the questions here.
There’s a question about how long the IRS will honor the old method of calculating tax based on number of dependents.
Jeff Pera (Speaker, CBIZ)
So that’s interesting.
The short answer is: I don’t know.
It’s really the payroll companies that seem to be kind of clinging on to that and giving that flexibility for people to have the old, “I want to claim zero,” “I want to claim exempt,” whatever, or “I have seven dependents that I want to put on there.”
So their tables still exist to do that.
I think there would be less to your advantage to continue using that version of the W-4 and that version of the payroll tax tables because you’re going to have more taxes withheld.
So if you’re one of those folks that likes to have the IRS be a savings plan for you—that you like getting a big refund check in April—then maybe you want to keep using that table.
But if you want to only pay in what you need to have and keep that money in your bank account and able to be put to work for yourself during the year, then I think you want to try the new W-4s as soon as they come out.
I would imagine that with the new provisions that you are going to see a reduction in your tax, because now you have an increased state and local tax deduction, you have the overtime pay that you can exclude or deduct.
To Patrick’s point, if you claimed two exemptions in your W-4, you may want to claim four or five, and that’s something that you probably want to look at before the end of the year to take advantage of the reduction in the withholding that the new provisions will provide for you.
Christina Lau (Host, Fourth)
All right, another question is: Are employees required to fill out the new 2026 W-4?
Patrick O’Reilly (Speaker, CBIZ)
I don’t know about “required.” I think “required” might be a strong word.
I think, to Jeff’s point he just made, it makes sense for them to do it because it is going to make their withholdings more accurate, especially given that they would be a directly tipped employee or are receiving overtime that might have a credit available to them.
Super best practice—and that’s not “requirement,” right?—but best practice is: use the current form for new employees.
So if you’re handing an employee the old, old form, right—the one that has the exemption questions on it—that’s at least three years old now, maybe four years old.
So if you’re hiring somebody in 2026 and you’re giving them a form that’s four years old, that is certainly not best practice.
You’d want to be using the current year’s form, just like you want to be using the most current version of the I-9s; you would want to use the current version of the W-4.
Christina Lau (Host, Fourth)
Okay, next question: Are state taxes still applied to tips, or is this just a federal change?
Jeff Pera (Speaker, CBIZ)
This is a federal change.
Now, some states have adopted it, and you’ll have to, depending on the state that you reside in or work in, check with the state taxing authority’s website to make sure that the provisions that are included in the One Big Beautiful Bill are also being adopted in the state in which you reside.
If it is, then you’ve got an easy situation to deal with under your 1040.
But if it isn’t, then of course you’ve got to take that into account when you look at not only your W-4 for federal purposes, but your W-4 for state purposes, to make sure that you’re not being under-withheld on state taxes to the extent that the state in which you reside doesn’t follow these same federal rules.
Patrick O’Reilly (Speaker, CBIZ)
That’s a great point.
We didn’t really talk about state W-4s, but to my knowledge all states have a state W-4. Maybe that’s not exactly true—I haven’t looked at all of them—but there’s typically a state form which has a different payroll tax table that they are using to calculate those numbers from, and you should have an employee fill out the federal form and the state form in whatever jurisdiction you’re in.
And again, I would say it’s more of an employee responsibility, not an employer responsibility.
So the employer, on the one hand, should provide employees with enough information to do it, but it’s really up to the employee to determine how many exemptions at the federal and state level they’re going to claim.
Christina Lau (Host, Fourth)
Okay. We’re going to take just one more question here.
I don’t know if this is somewhat related, but: If employees are pooled between locations, how do we handle their W-2s—one per location, or combined?
Patrick O’Reilly (Speaker, CBIZ)
I think it depends on if there are two locations in one state. That’s one thing.
But if you’ve got pooled employees operating in two different states, then it becomes a little bit more of a problematic answer to your question.
So it really depends on the nuance of what you’re talking about.
But I would think that if you’re pooling the employee between two locations in the same state, that’s going to be easier to deal with than if you had two different states you’re talking about, and also if you have two different payroll tax ID numbers that you were reporting under as well, or if it was combined.
Christina Lau (Host, Fourth)
Okay, thank you, Patrick and Jeff.
We are all out of time for today, so thank you all for joining us and for your questions, and hopefully this was helpful for you.
We do webinars every month, so we hope to see you at the next one. But otherwise, have a great rest of your day, afternoon, or evening, depending on when you’re tuning in, and we hope to see you soon.
Patrick O’Reilly (Speaker, CBIZ)
Thanks all.
Jeff Pera (Speaker, CBIZ)
Thank you.
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