04:05 Issue 14

04:05 AMERICAS

By Oct. 2, 2025, the Treasury Secretary is required to publish a list of occupations that traditionally receive tips for the purpose of determining who qualifies. The definition of a tip is an amount paid voluntarily without any consequence in the event of nonpayment, is not the subject of negotiation, and is determined by the payor. Tips must be paid in cash or by charge and can include tip- pooling amounts. Tip amounts can be tax-free up to $25,000 in a year. An overall income threshold to qualify for the exclusion includes a gradual phase-out of the ability to deduct amounts starting at $150,000 in “modified adjusted gross income” a year. Reporting of amounts to the government and the receiver of tip pay will be required. Nonemployees receiving tips also are eligible under this provision. The Treasury Secretary is required to modify income tax withholding procedures for years starting Jan. 1, 2026.

How are these potentially deductible amounts to be reported on employer tax forms, such as Form 941, Employer’s Quarterly Federal Tax Return? What will be considered a reasonable approximation of qualified amounts for the 2025 calendar year? Will the Treasury Secretary adjust Form W-4 instructions so employees can exclude appropriate amounts from withholding? Will federal tax withholding tables be adjusted to account for the deduction? What We Know About The Tip Income Provision Similar to the no tax on overtime provision, the no tax on tips provision is also effective for four calendar years: from 2025 through 2028. The law’s language also has aspects that are understood on their face. These include: The law is applicable to those with a Social Security number and who receive cash tips by working in an occupation which customarily and regularly received tips on or before December 31, 2024.

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GLOBAL PAYROLL MAGAZINE ISSUE 14

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