Policy Update Series: One Big Beautiful Bill Act (OBBBA)

As part of our ongoing commitment to keep our community informed of significant tax and compliance developments, we are launching a series of updates on the recently enacted One Big Beautiful Bill Act (OBBBA). This legislation contains several provisions that directly affect municipal operations, payroll administration, and employee compensation. We will continue to provide timely guidance as new IRS regulations, state responses, and implementation details are released.

Update #1: The New Tip Deduction

The OBBBA introduces a new federal income tax deduction for “qualified tips.” This change directly affects municipalities that employ tipped workers in golf, banquet, and event operations.

What Has Changed

• Beginning in tax year 2025, employees in occupations that customarily and regularly receive tips may deduct up to $25,000 of qualified tips from their federal taxable income.
• The deduction phases out for individuals with modified adjusted gross income (MAGI) above $150,000 (or $300,000 for joint filers).
• The provision applies only through 2028, unless extended by Congress.

Recommended Next Steps for Municipal Employers

• Coordinate with Finance/Payroll departments to ensure all tips are currently being reported on employees' W-2 to ensure they can maximize their deduction amounts. 
• Educate Supervisors & Staff about the deduction while clarifying that tips are still subject to FICA and must be reported.
• Review HR Policies & Handbooks to reflect the new rules.
• Monitor IRS Guidance on eligible occupations and reporting, expected by October 2025.
• Maintain Strong Recordkeeping to support employee claims and ensure compliance.

Summary

The OBBBA provides a new tax benefit by allowing employees to deduct up to $25,000 of qualified tips from federal income tax, but does not eliminate employer and employee responsibilities related to FICA, unemployment taxes, or wage/hour rules.

We will continue to provide updates as guidance is released, ensuring municipalities have the information they need to stay compliant.

Stay Connected, Stay Informed

These tax law updates are just the beginning and guidance will continue to evolve at both the state and federal level. Follow John Kasperek Co., Inc. on LinkedIn to stay ahead of the curve with timely updates, insights, and resources tailored for Illinois governments, schools, and municipalities.