NEW FEDERAL LAW ON TIPS AND OVERTIME

House Resolution 1 is a new federal law that gives employees who receive tips or overtime pay a temporary tax break on their federal income taxes. The tax break is temporary and does not apply to all tips or all overtime pay. The new law also imposes new tracking and W-2 reporting requirements on employers.

Tax deduction for tips:

  • From 2025-2028, tipped employees can deduct up to $25,000 in “qualified” tips from their taxable income (i.e., pay no federal income tax on them).
  • To qualify, the tip must be (a) paid voluntarily and (b) in an amount determined by the customer.
  • Mandatory gratuities imposed by a restaurant (such as those automatically added to the bill for large parties) do not qualify for the deduction. Likewise, mandatory service charges imposed by an employer (such as for a banquet or catered event), do not qualify for the deduction. Employees still must pay tax on both these types of tips.
  • While employers have long been required to report 100% of all tips received by employees to the IRS (including cash tips, tip-sharing, and tips charged to a credit card), the new law requires employers to include the total amount of qualified tips reported by each tipped employee, as well as the employee’s occupation.

Tax deduction for overtime:

  • From 2025-2028, employees can deduct up to $12,500 of overtime pay from their taxable income (i.e., pay no federal income tax).
  • The deduction only applies to overtime that is required under the Fair Labor Standards Act.
  • This new deduction only applies to the portion of an employee’s overtime pay that is greater than their normal hourly rate. Overtime pay is time and a half an employee’s regular pay, and this new tax deduction only applies to the extra “half.”

Example: An employee paid $20/hour works 10 hours of overtime. They must be paid for 10 hours of overtime pay at $30/hour for each hour of overtime (their usual pay of $20/hour plus an additional $10/hour for the overtime), for a total of $300 in overtime pay. Only $100 of the total overtime pay will now be tax exempt; the employee will still owe taxes on $200 of their total overtime pay. Only the “half” — the extra $10/hour — is tax exempt, not the entire overtime pay of $30/hour. The employee still has to pay normal federal income taxes on their $20/hour pay for each overtime hour because it’s their normal pay rate.

  • Employers are now required to report the amount of qualified overtime (i.e., the extra “half” in time and a half) on the employee’s yearly W-2, which means employers now have to separately track the full amount of each employee’s overtime pay (time and a half) as well as the amount of extra pay per overtime hour (the extra $10 hour in the above example) above the employee’s normal rate.

LEGISLATIVE UPDATE

These new laws were recently approved by the Legislature and Governor and take effect as indicated:

Elimination of Business Rent Tax: Starting October 1st, Florida businesses will no longer have to pay sales tax on their rent. The tax rate had been as high as 4.5% plus local county taxes and was lowered to 2% in 2024 but will now finally be phased out completely.

Sales tax exemption for back-to-school shopping every August: The entire month of August will now be tax-free for qualifying items:

  • Clothes, shoes, and accessories selling for $100 or less
  • School supplies selling for $50 or less
  • Computers and related accessories selling for $1,500 or less (when purchased for non-commercial and personal use)
  • Learning aids and jigsaw puzzles selling for $30 or less

Permanent sales tax exemption for hurricane supplies and outdoor items: Starting August 1st, the following items will be permanently exempt from the state sales tax: sunscreen, insect repellant, life jackets, bicycle helmets, batteries, smoke detectors/alarms, carbon monoxide detectors, fire extinguishers, portable generators, gas cans, tarps, and tie down kits.

Mandatory tip disclosure: Effective July 1, 2026, restaurants will be required to let customers know in writing and in advance if they include gratuity or service charges on a food bill. The amount must also be listed separately on the customer’s receipt.

New mandatory roofing disclosures: Effective immediately, all contracts to repair or replace roofs in Florida must contain two new mandatory disclosures: (1) the customer can cancel the contract within 10 days and (2) if the roofing is work is related to an insurance claim, the property owner should ask their insurance company to verify coverage for the work prior to signing the contract.

Expansion of noncompete enforcement: Effective July 1, 2025, it will be easier for employers to enforce noncompete agreements.

The following issues were discussed but not approved by the Legislature and will not become law:

  • Reduction of state sales tax rate from 6% to 5.25%
  • Reduction in property taxes
  • Child labor: 16 and 17-year-olds would have been allowed to work overnight hours and fulltime even during school. 14 and 15-year-olds who are homeschooled, attend virtual school, or have already graduated would have been allowed to work more hours.
  • Sub-minimum wage for some workers: Would have allowed some workers like interns and apprentices to be paid below the Florida minimum wage.
  • E-verify expansion: Would have required all Florida businesses, regardless of size, to use the federal E-verify system to check that new hires are legally able to work in the United States. Currently, only businesses with 25 or more employees are required to use E-verify for new hires.