By Kerri Rawcliffe, CPA Partner and Amber Stone, CPA, Director
Key Takeaways
The One Big Beautiful Bill Act introduces federal income tax deductions for up to $12,500 in overtime wages and $25,000 in voluntary tips for qualified employees.
These deductions apply at the employee level and require proper reporting, with no direct change to club finances or payroll obligations beyond potential system updates.
Non-tipping clubs should monitor labor trends, as the favorable tax treatment for tipped employees may affect recruitment and compensation strategy.
The recently passed One Big Beautiful Bill Act (OBBBA) contains sweeping changes that have varying degrees of impact on all businesses. Its provisions on the taxability of tips and overtime wages will have the greatest impact on private clubs and their employees.
Reduced Tax on Overtime Wages
Up to $12,500 in overtime wages will now be exempt from federal income tax for qualified employees. The exemption will be received as a deduction on the employees’ federal income tax return, based on information provided on the W-2. As a result, there will be a minimal direct impact on the club other than possible coding changes required by the payroll company and employees may wish to adjust their withholdings.
Highlights include:
- Deduction increases to $25,000 for married filing joint taxpayers.
- No deduction available for married filing separate taxpayers.
- The deduction begins to phase out for modified adjusted gross income of $150,000 (or $300,000 for married filing joint).
- State income taxes and federal Social Security and Medicare taxes are not reduced or exempt as a part of this bill.
- Currently effective January 1, 2025, through December 31, 2028.
Reduced Tax on Voluntary Tips
Up to $25,000 in voluntary tips will now be exempt from federal income tax for qualified employees. The exemption will be received as a deduction on the employees’ federal income tax return, based on information provided on the W-2. Mandatory service charges do not count as voluntary tips and as a result mandatory service charges paid out to employees do not qualify. As a reminder, mandatory service charges are a fee, generally percentage based, automatically added on to a bill. When the fee is paid out to employees, it must be reported as regular wages in box 1 of the W-2 while voluntary tips are in box 7. Employees may need clarification on the differences between voluntary tips and mandatory service charges.
PKFOD Observation: Many clubs are non-tipping environments and offer a higher hourly rate to make total pay comparable to a standard restaurant with tipped employees. With this legislation, tipped employees have favorable income tax treatment, although the savings are dependent on individual tax rates. Employees and potential employees may view working at a non-tipping club as a disadvantage and the club will need to monitor the labor market.
Highlights include: Applicable to employees who customarily and regularly receive tips, which the IRS is tasked with providing a list of applicable jobs.
- No deduction available for married filing separate taxpayers.
- The deduction begins to phase out for modified adjusted gross income of $150,000 (or $300,000 for married filing joint).
- State income taxes and federal Social Security and Medicare taxes are not reduced or exempt as a part of this bill.
- Currently effective January 1, 2025, through December 31, 2028.
Next Steps
Overall, these changes will not have a significant impact on the day-to-day operations or accounting at the club; however, we recommend taking the following steps:
- Contact your payroll provider for guidance on changes to data entry necessary to ensure proper W-2 reporting.
- Double check that voluntary tips and mandatory service charges paid to employees are being properly reported.
- Determine how much information the club is comfortable providing to employees – they will likely come to the accounting department with questions, but the club is not responsible for advising employees on their personal income taxes.
- Clubs, especially non-tipping clubs, will need to monitor the labor market and hiring trends to remain competitive and attract qualified employees.
Contact Us
We welcome the opportunity to answer any questions you may have related to this topic or any other accounting, audit, tax or advisory matters for private clubs. Please reach out to your PKF O’Connor Davies client service team or:
Kerri Rawcliffe, CPA
Partner
krawcliffe@pkfod.com
Amber Stone, CPA
Director
astone@pkfod.com