A federal bill signed into law on July 4, 2025, the One Big Beautiful Bill Act, changes how some taxes work for certain kinds of pay. Review the previous communication, One Big Beautiful Bill Act – No Tax on Qualified Tips and Overtime.

The new law provides a tax deduction for certain types of overtime pay earned between 2025 and 2028. Importantly, this tax treatment applies when you file your annual tax return, not on each paycheck. MSU will continue to withhold normal taxes from your pay throughout the year.

Additionally, please see general information from the IRS web page, Treasury, IRS provide guidance for individuals who received tips or overtime during tax year 2025.

Additional fact sheet on new deduction for qualified overtime is available on the IRS web page, Questions and answers about the new deduction for qualified overtime compensation. 

The federal law that was passed only provided tax deductions based on certain overtime pay and tips, when filing tax returns. It did not eliminate income taxes on:

• All tips
• All overtime

State, local, and other non-federal income payroll taxes are not impacted.

The federal government has stated that employers are not required to calculate or provide exact amounts related to tax-exempt treatment of tips earned or overtime wages for 2025.
In practical terms, this means:

• The federal guidance does not mandate that employers determine, certify, or report a precise “no tax on tips or overtime” amount for employees.
• Employers will not be penalized under federal rules for not supplying this calculation.
• The obligation to substantiate eligibility or amounts, if required, rests with the employee rather than the employer.

Only non-exempt employees, who are federally required to earn overtime, are eligible.  APA and APSA employees who make $35,568 or more, annually, are considered exempt at MSU and are not eligible, even though the collective bargaining agreement affords overtime to those level 11 and below.

MSU has used the IRS recommended approach to reporting tips and overtime. We recommend consulting with a tax accountant or advisor to determine a reasonable estimate of tips or overtime premium (the “half” piece of “time and a half”) to claim when filing your taxes. You will be responsible for justifying the amounts used to file taxes with the IRS.

We recommend working with a tax accountant or advisor to review the information you received and to determine which steps to take in filing your 2025 tax return.

There are two possible reasons this may occur:

1. For purposes of tax reporting under the requirements of the No Tax on Tips/Overtime rule, only overtime earned according to federal overtime (FLSA) rules apply. This means only overtime earned over 40 hours worked within a workweek is eligible to be reported as part of this overtime. This could be different than how overtime is calculated under your collective bargaining agreement, if applicable. Some union contracts may have more beneficial overtime rules than what is federally required under FLSA.
   • Example #1 – Employee A has a union contract that requires us to pay overtime for any hours worked over an 8-hour shift. During the workweek, the employee worked the following schedule:
     • Monday – worked 10 hours
     • Tuesday – worked 8 hours
     • Wednesday – worked 8 hours
     • Thursday – 8 hours of vacation
     • Friday – 8 hours of vacation
   • In this scenario for Employee A, under the collective bargaining agreement, the individual earned 2.0 hours of overtime for working 10 hours on Monday. From a federal overtime (FLSA) perspective, only 26 hours were worked during the week, as vacation does not count as time worked, and so no overtime was earned under federal FLSA requirements.
     
     
2. The other reason the overtime amount may seem low is due to the requirement to report only federal overtime, but also only the dollar amount associated with the premium portion of overtime. This is the “half” piece of the time and a half paid in overtime.
   • Example #2: Employee B worked 2 hours of federally recognized overtime in a week, with a regular pay rate of $20 per hour. The total federal overtime amount paid to cover the extra 2 hours is 2 X $30/hour ($20 * 1.5) which equals $60 dollars extra for all the overtime.
     • The premium “half” piece is only a part of this: 2 hours X $10 hours ($20 * .5), which equals $20 in overtime premium only.
     • For purpose of the W2 addendum, only the premium portion is reported, which in this example would be $20 total, instead of $60.

All overtime information was systematically pulled using the pay and time reported through the HR-Payroll System to determine hours worked that count towards federal FLSA overtime. In some cases where individuals have more beneficial contractual overtime, versus federal FLSA overtime, we calculated the federal overtime hours worked from time-keeping records.

The following tips are qualified:

• Cash or credit card tips that customers give on their own (not required)
• Tips shared with coworkers through a tip pool
• Tips that are reported on your W-2

Tips that do not qualify include:

• Service charges automatically added to bills (like for large parties)
• Required gratuities or commissions

For tipped employees, Box 1 on the W2 reflects all wages that are subject to federal tax, including all tips and other earnings. Box 7 specifically reports the qualified tips to use as tax deductible tips for 2025.