The Internal Revenue Service (IRS) confirmed on August 7, 2025, that there will be no changes to withholding tables, including Forms W-2, 1099, and 941, for the 2025 tax year.
This decision aims to avoid disruptions in the tax process while giving taxpayers and employers time to adjust to the forthcoming changes set by the One Big Beautiful Bill. According to the IRS statement, withholding levels will remain unchanged for the time being to ensure a smoother transition.
No Immediate Changes to Withholding Tax for Tips or Overtime
This decision implies that no immediate adjustments will be made to withholding tax related to tips or overtime for the 2025 tax year. However, the IRS confirmed that its technical staff is actively working on updating tax formats and protocols for fiscal year 2026, when the core provisions of the regulations will come into effect.
Projections for Larger Tax Refunds in 2026
While the IRS has not explicitly confirmed that taxpayers will receive larger refunds in 2026, independent analysts predict that the current withholding setup, adjusted for future deductions, could result in larger tax refunds.
Specifically, the introduction of federal deductions on qualified tip income (up to $25,000) and qualified overtime (up to $12,500) could lead to increased refunds, though these changes will only be applied when filing taxes in 2026.
The One Big Beautiful Bill Act (P.L. 119-21) establishes these tax benefits for fiscal years 2025 through 2028, regardless of whether the taxpayer itemizes their expenses.
This means that, while no immediate changes will occur for the 2025 filing season, adjustments related to tip and overtime deductions will be reflected in 2026 tax returns.
Two Key Tax Deductions Introduced in New Regulations
The new regulations introduce two significant tax-reduction mechanisms:
- Qualified Tip Income Deduction – Workers in industries where tips are common will be able to deduct up to $25,000 from their taxable income.
- Qualified Overtime Deduction – This allows a deduction of up to $12,500 ($25,000 for joint returns) on the excess portion of regular pay for overtime hours worked.
Both deductions have phase-out provisions based on Modified Adjusted Gross Income (MAGI), so they will be reduced or eliminated for higher-income earners.
Other Tax Benefits Expanding Under the New Law
Additionally, the One Big Beautiful Bill Act increases several other tax benefits:
The SALT (State and Local Tax) deduction limit is raised to $40,000 for certain taxpayers.
The Child Tax Credit is also increased.
Additional benefits for seniors have been incorporated into the new regulations.
Despite these beneficial changes, the IRS has emphasized that withholding rates for 2025 will not be impacted. These changes will directly affect tax returns filed in 2026.
How Your 2026 Tax Refund Could Be Affected
Companies will need to update their payroll systems with the new tax forms and procedures throughout 2025. Taxpayers will need to maintain accurate records of any tip and overtime income during this time. This documentation will be crucial when filing taxes for the 2026 season.
The IRS recommends that taxpayers stay informed by checking its official channels for the final guidelines, which will be published before October 2, 2025. Though the impact on tax refunds in 2026 is still under evaluation, the IRS suggests consulting a tax advisor if you have questions about your personal situation.
For now, tax preparation for the 2025 filing season will continue under the existing guidelines, with significant changes expected to take effect in 2026.
