What Happened?

As a reminder for employers with workers in Rhode Island, on October 2, 2025, the Rhode Island Division of Taxation issued guidance confirming the state does not follow the federal “no tax on tips” and “no tax on overtime” provisions under the One Big Beautiful Bill Act. Tips and overtime remain fully taxable for Rhode Island state income tax and must continue to be included in Rhode Island taxable wages.

Overview

• Rhode Island position: Even if employees qualify for the federal benefit, Rhode Island has decoupled tips and overtime remain fully taxable for state income tax purposes.

• What this means for payroll in Rhode Island: Continue Rhode Island income tax withholding on all wages, including tips and overtime. There is no state-level payroll carve-out for these amounts.

Federal rules: Federal “no tax on tips” and “no tax on overtime” as deductions claimed on the individual federal tax return (not as automatic tax-free paychecks), and for tax year 2025 the Internal Revenue Service stated there were no changes to key payroll forms or federal withholding tables for these provisions.

Why this matters:

• Avoids under-withholding risk: Treating tips or overtime as non-taxable for Rhode Island purposes could lead to incorrect state withholding and potential employee tax liability at filing.

• Reduces employee confusion: Employees may hear the federal “no tax” messaging, but Rhode Island still taxes these amounts. Clear communication helps prevent disputes and questions.

Key Risks for Employers

• Incorrect Rhode Island taxable wage calculations: Tips and overtime remain taxable in Rhode Island, so they must be included in taxable wages for withholding; otherwise, withholding may be too low.

• Miscommunication to employees: Suggesting Rhode Island taxes will decrease because of the federal change may cause confusion or complaints.

• Process drift in 2025: Payroll teams may mistakenly adjust settings due to the federal policy shift even though federal forms and withholding did not change.

Bottom Line: Rhode Island has not aligned with the federal changes, so employers should keep withholding state income tax on all tips and overtime and continue using existing payroll configurations. Clear communication with employees is important to avoid confusion, since federal messaging may suggest these amounts are tax‑free even though Rhode Island still taxes them.

Source References

• Rhode Island – Division of Taxation – ADV 2025-20 (October 2, 2025)

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