After highly contentious debate in the House and Senate in the last few weeks, Congress recently passed—and President Trump signed into law—the so-called “Big, Beautiful Bill.” The federal spending plan was championed by Republicans, who supported the extension of tax cuts and broader defense spending, while Democrats sharply criticized the funding of such increases by slashing Medicaid and other programs.
Given the broad nature of the measure, it will, unsurprisingly, impact employers in a range of ways, experts say, perhaps most visibly related to new tax regulations on overtime and tips.
According to Nisha Verma, a labor and employment litigation partner at Dorsey, a key tax change for overtime and tip payments will likely drive some new employer trends.
According to the White House, under the new law, workers will now be able to deduct on their taxes amounts paid to them as tips and/or overtime. With some caveats, workers can deduct up to $25,000 in tips and $12,500 in overtime pay.
That alone, Verma says, could produce “interesting side effects” within the employment landscape, including a much sharper focus on overtime management. Employees will likely feel incentivized to seek more overtime compensation, and, as a result, leadership may need to consider new rules that limit overtime.
She says some wage and service industries have already broadened overtime and tips tax relief over the past few years.
“That employer strategy has been driven, in part, by competition and a strong job market, as employees could easily jump to a job with tips—prompting more employers to set up a tip system,” she says. The tip deduction will accelerate that trend, while at the same time, it may discourage employers from raising base wages.
A trickle-down effect
Tip pooling is also likely to become more controversial, she says. Employer policies that require sharing tips with workers in the “chain of service” are already subject to less-than-certain rules.
“With a new premium on tips, we may see more challenges to sharing policies,” Verma says.
Verma notes that the new deduction could also drive challenges to the “exempt classification.” These are the federal rules that determine whether an employee is salaried and, thus, exempt from receiving overtime pay.
“It’s already trickier than most employers realize,” she says. “The deduction may lead more exempt employees to scrutinize, and then subsequently challenge, their classification.”
The state-level impact
The shift could also fuel “tipped minimum wage” issues. The federal minimum wage for tipped employees is currently $2.13 per hour, Verma says, and the new law may give Congress—and state legislatures that haven’t already boosted that amount—more reason to delay increases.
Finally, Verma says, states including Arkansas, California, Colorado and Nevada, as well as Oregon in certain industries, have daily overtime pay requirements that exceed federal law. However, those laws don’t require employers to list which hours they are paying as daily overtime and which as weekly.
“The new federal deduction only applies to weekly OT,” Verma notes, “so employers will have to find a way to identify weekly OT specifically on a W2 form.”
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