Compliance Challenge: Overtime and Tips No Longer Taxed? What Florida Employers Need to Know Now

The One Big Beautiful Bill, which was very recently signed into law, contains a headline-grabbing provision for working Americans: federal income taxes will no longer apply to qualifying overtime pay and tipped wages, beginning in 2025. While the new rule may seem simple on its face, it introduces new compliance challenges for Florida employers—especially in the hospitality, food service, and construction industries.

Here’s what employers need to understand and start preparing for.

Tax Relief for Workers, Reporting Challenges for Employers

The law allows employees to deduct certain overtime wages and cash tips from their federal taxable income:

• Up to $25,000 in tips per year

• Up to $12,500 in overtime pay per year

  Phase-outs begin at a modified adjusted gross income of $150,000 for single filers and $300,000 for joint returns.

Although this may sound like a simple tax break, it imposes a burden on employers to accurately track and report this income. Starting January 1, 2025, employers must separately report both qualifying overtime and tipped wages on W‑2s or via other IRS-prescribed methods. These entries will support workers’ tax filings but must also be substantiated in case of an audit.

Payroll Taxes Still Apply

Importantly, this change affects only federal income tax, not FICA or Medicare taxes. Employers must continue to withhold and pay these employment taxes on the full amounts earned, including tips and overtime.

Florida’s lack of a state income tax simplifies implementation somewhat, but that doesn’t relieve employers of federal compliance responsibilities.

“Reasonable Method” Reporting and Legal Risks

IRS guidance will allow employers to use a "reasonable method" to estimate qualifying overtime and tips. However, employers may not manipulate hours, wages, or classifications to artificially boost the amount considered “qualified.” Misclassification or over-reporting could violate both tax law and wage-and-hour regulations under the Fair Labor Standards Act (FLSA).

For instance, an employer cannot begin classifying standard hourly wages as "overtime" merely to help workers lower their tax bills. Doing so could trigger enforcement action from the U.S. Department of Labor.

Employers must also comply with strict rules for tip pooling and tip reporting. Any deviation, such as coercive tip redistribution or underreporting, may create significant exposure.

Key Action Items for Florida Employers

Employers are strongly urged to take proactive steps now:

1. Audit Payroll Systems: Ensure your payroll software can itemize and distinguish “qualified” overtime and tips from other earnings.

2. Train HR and Payroll Staff: Personnel must understand both the reporting requirements and the limits of employer discretion.

3. Communicate with Employees: Employees will need clear documentation and W‑2 support to claim deductions on their federal tax returns. Misinformation could lead to penalties or missed deductions.

4. Avoid Wage Scheme Pitfalls: Don’t restructure compensation models solely to exploit the deduction. Stay grounded in FLSA compliance and avoid reclassification gimmicks.

5. Stay Informed: The IRS is expected to issue further regulations on compliance, enforcement, and reporting. Employers should monitor Treasury guidance and consult tax counsel regularly.

Final Thoughts

The idea of tax-free tips and overtime may sound like a political gimmick, but it is now the law—and it has real implications for employers. For Florida businesses, the key is balancing tax reporting accuracy with wage-and-hour law compliance. The cost of noncompliance could far outweigh the benefits.

In short, this isn’t just a tax change. It’s a payroll, HR, and compliance challenge. And it’s time to start preparing.