Why It Matters for Employers

Even though these deductions are claimed by employees, employers play a critical role in helping staff take full advantage of the law. Clear payroll practices, proper tip and overtime tracking, and communication about vehicle benefits can:

• Reduce employee frustration and confusion at tax time.
• Minimize errors in wage reporting that could trigger IRS inquiries.
• Position the organization as a proactive and employee-friendly employer.

1. Deducting Qualified Tips

Workers who earn tips may be able to deduct up to $25,000 in qualified tips. This deduction is available whether a taxpayer claims the standard deduction or itemizes, but there are a few requirements:

• Tips must be properly reported.
• Married taxpayers must file jointly to claim the deduction.
• The benefit begins to phase out when modified adjusted gross income (MAGI) exceeds:
  • $150,000 for single filers
  • $300,000 for married couples filing jointly.

The new instructions also include worksheets, examples, and guidance on which occupations typically qualify as tipped positions. Check out our blog, New Tip Deduction under OBBBA: Preliminary Occupations List. 

Employer tip: Employers in tipped industries should review tip reporting and payroll systems to ensure employee tips are accurately captured and reported on Forms W-2. Clear communication with employees about reporting requirements may also help them fully benefit from the new deduction while reducing compliance risks.

2. Deduction for Overtime Pay

Certain workers can also deduct qualified overtime compensation. The deduction allows taxpayers to claim up to:

• $12,500 for single filers
• $25,000 for married couples filing jointly

Like the tip deduction, this benefit phases out once MAGI exceeds $150,000 for single taxpayers or $300,000 for joint filers. Qualified overtime generally refers to pay required under the Fair Labor Standards Act of 1938 that exceeds an employee’s regular rate of pay.

Employer tip: Because employees may now receive a tax deduction tied to overtime wages, employers should ensure overtime is clearly identified and properly coded in payroll records. Accurate wage reporting will help employees substantiate their deductions and reduce the likelihood of IRS inquiries.

3. Deducting Car Loan Interest

Another new provision allows taxpayers to deduct interest on certain passenger vehicle loans. The instructions clarify what qualifies, including definitions for:

• Qualified passenger vehicle loan interest
• Eligible passenger vehicles
• Vehicles with final assembly in the United States
• Loans used for personal use vehicles

This deduction can also be claimed whether or not the taxpayer itemizes.

Employer tip: Organizations that provide vehicle stipends, reimbursements, or company vehicle programs may want to review how those benefits interact with employees’ personal vehicle financing and tax reporting. Clear policies can help employees understand what expenses qualify for personal deductions.

Filing Tips from the IRS

The IRS continues to encourage taxpayers to file electronically and choose direct deposit for refunds. Electronic filing helps reduce calculation errors and ensures tax software can prompt taxpayers for missing information.

For many taxpayers, the new Schedule 1-A will be the key to unlocking these new deductions and understanding how the provisions of the One Big Beautiful Bill apply to their situation.