The Overtime Bonus and Benefits for Better America Act of 2025 (OBBBA) introduces new federal tax rules that impact many workers in Maryland and the DC area. Although it doesn't overhaul wage and hour law, it adds a federal income tax deduction for eligible overtime and tipped income between 2025 and 2028.
At Lebau & Neuworth, we’re helping employees understand how the new law may affect their pay, taxes, and potential wage claims. Here’s what Maryland workers need to know.
Only employees are eligible for the new tax deduction. Independent contractors and other non-employee workers do not qualify. However, if you were misclassified as an independent contractor, you may still be eligible for the deduction if your status is corrected and other criteria are met.
The income thresholds are:
These limits remain unchanged through 2028—there’s no adjustment for inflation.
The only portion of overtime income that qualifies for the deduction is the extra half-time pay required under the Fair Labor Standards Act (FLSA)—not the full hourly wage.
Eligible tips include:
Mandatory service charges or automatic gratuities do not count. Non-cash gifts or bonuses (like gift baskets) are also excluded.
If you win or settle a wage and hour claim, any awarded income—including overtime or tip pay—is still taxable. This law only affects federal income tax; payroll taxes and state income tax rules remain the same.
The deduction reduces taxable income, not the amount of tax owed directly. Its value depends on:
The benefit may be modest unless your overtime and tip income is substantial.
Starting with the 2025 tax year, employers must use a revised W-2 form that includes a separate box for overtime and tipped income. For settlements, it’s critical that agreements:
Without this breakdown, both employees and their attorneys may face IRS scrutiny. Courts may also reject settlements that don’t itemize wage-related payments, particularly in FLSA cases.
The OBBBA creates a new private right of action against employers who intentionally misreport or underreport overtime or tipped income. This includes:
Each willful violation may lead to a $5,000 penalty per employee, per year. These penalties apply in addition to any wage and hour claims under existing federal or state law.
If you suspect your employer failed to:
You may have grounds for both a wage claim and a tax law violation claim. You can also file a complaint with the IRS or explore options under the IRS whistleblower program, which may reward reports of significant tax underpayment.
The 2025 tax law may not change your paycheck today, but it introduces important new rules for reporting income and calculating federal tax. For employees involved in tip-heavy or overtime-heavy roles, or for those dealing with wage disputes, the changes add new reasons to ensure everything is properly documented and reported.
If you believe your employer isn’t reporting your pay correctly—or you think you’ve been misclassified—reach out to an employment attorney. At Lebau & Neuworth, we’re committed to helping employees across Maryland and the DC area protect their rights and hold employers accountable. Contact us today to schedule a consultation and learn more about your options.
