The One, Big, Beautiful Bill (OBBB) Act is now law. Since it was signed on July 4, 2025, you’ve probably heard of or searched the long list of tax changes that come as a result.
If you manage payroll or time tracking, two OBBB/OBBBA provisions land directly in your world: new federal income tax deductions tied to tips and overtime pay.
While you may have heard certain provisions like “no tax on tips” and “no tax on overtime” come from the press around OBBB, the reality is much more specific for your organization. For tax years 2025–2028 (i.e. starting with 2026 tax filing), eligible employees may be able to deduct certain qualified tips and qualified overtime compensation on their federal income tax returns.
Why this matters to you now: Pay periods you’re running this year will show up on W-2s next year (2026). If your time tracking and payroll systems don’t separate tips, service charges, regular pay, and FLSA overtime premiums cleanly, employees may miss out on deductions. Plus, your organization may face more complex reporting and audit questions than necessary as a result.
In this article, you’ll find:
- What OBBB actually changes around tips and overtime
- Industries impacted by OBBB
- Common questions HR and payroll leaders are asking
- How these provisions affect your payroll processes and time tracking
- Practical next steps for both employers and employees
[Disclaimer: This article is not a substitute for financial or legal guidance. Always verify that the information, as it exists, is up to date and accurate.]
What OBBB changes: The rules, defined
The One Big Beautiful Bill Act, known as OBBB or OBBBA, is a broad federal tax law, but only a few provisions intersect with how you track time and wages day to day. For tax years 2025 through 2028, it creates two new federal income tax deductions for employees:
- A deduction for qualified tips
- A deduction for qualified overtime compensation
These deductions lower taxable income for employees. However, OBBB does not change how employers like yourself calculate gross wages or payroll taxes like Social Security and Medicare (FICA) or FUTA. Your payroll tax obligations don’t vanish.
But your wage data now feeds directly into whether employees can claim these new deductions and whether your organization can meet new reporting requirements.
How the new tip deduction works under OBBB
Under OBBB, employees in certain tipping occupations — most commonly in hospitality, but not limited to it — may be able to deduct part of their tip income from their federal taxable income. In practice, that means:
- IRS-recognized occupations that are “customarily and regularly receiving tips” (Sec. 224. Qualified Tips) qualify for the deduction.
- Deductions count for voluntary cash and charged tips, along with valid tip-pool distributions, properly reported on a Form W-2, Form 1099, or another IRS-accepted statement.
- Automatic service charges (for example, a mandatory 20% service fee) are not treated as tips for this deduction.
While it’s referred to as “no tax on tips,” the provision isn’t all-or-nothing. The details will ultimately live in IRS regulations and instructions, but the baseline is clear. Only “real” tips in IRS-recognized tipping occupations qualify, and they must be reported correctly.
Eligibility and limitations
| OBBB Category | Tax Rule |
|---|---|
| Maximum deduction | Up to $25,000 in qualified tips per year. |
| Income phase-out | Phases out above $150,000 MAGI (single) or $300,000 MAGI (married filing jointly). |
| Filing requirements | Employee must provide a valid SSN; married taxpayers must file jointly to claim the deduction. |
| Not eligible | Self-employed individuals and employees/owners of Specified Service Trades/Businesses (SSTBs) under §199A. |
The deduction is available whether or not an employee itemizes deductions, as long as they meet the eligibility criteria.
How the overtime deduction works under OBBB
OBBB also creates a separate deduction for certain overtime pay, i.e. “no tax on overtime,” but it’s narrower than “any overtime.” It applies only to qualified overtime compensation, meaning:
- Overtime pay premiums required under the Fair Labor Standards Act (FLSA)
- Just the premium rate, not the base rate
- Premium must be reported on a W-2, 1099, or other IRS-approved statement
Not all overtime rules beyond FLSA automatically qualify, including provisions like: daily overtime created by state law, double-time rules, or contractual/union-negotiated extra overtime that goes beyond federal minimums.
While your organization may count these as overtime, they’re not eligible for the deduction.
Eligibility and limitations
| Category | Rule |
|---|---|
| Maximum deduction | Up to $12,500 in qualified overtime compensation per year. |
| Joint filers limit | Up to $25,000 in qualified overtime compensation for married couples filing jointly. |
| Income phase-out | Phases out above $150,000 MAGI (single) or $300,000 MAGI (married filing jointly). |
| Filing requirements | Employee must provide a valid SSN; married taxpayers must file jointly to claim the deduction. |
| Itemizing | Available whether or not the employee itemizes, as long as other eligibility rules are met. |
In short, OBBB gives eligible employees new deductions without changing your core payroll taxes, but it does raise the bar on how cleanly you track and report on tips and overtime pay.
Which industries are impacted by OBBB?
Some sectors will feel the impact of OBBB more intensely than others:
- Hospitality and food service – Heavy tipping, variable schedules, multiple rates, mandatory meal/rest breaks, and overlapping state overtime rules make classification and reporting more complex.
- Beauty and personal care – With more establishments eligible for the expanded FICA tip credit under OBBB, tip reporting quality becomes even more valuable.
- Retail and grocery – Student workers, minors, and mixed part-time roles can complicate overtime classification and reporting.
- Public sector and union environments – Collective bargaining agreements often add layers of overtime and shift differential pay that need to be distinguished from FLSA-required overtime.
- Multi-rate and multi-location organizations – Employees moving between locations, roles, and rates in a single pay period need careful handling to calculate FLSA overtime premiums correctly.
If you’re in any of these environments, OBBB is a strong nudge to double-check your time tracking and payroll configuration now if you haven’t already. Naturally, you may have a few questions about OBBB’s impact on HR, time tracking, and payroll management.
FAQs about OBBB
Before jumping into OBBB process changes, it helps to clear up the most common questions you’re likely hearing from managers, staff, or leadership.
Do employers need to change payroll withholding right now?
No. For tax year 2025, keep using current federal income tax withholding tables; employees will claim the new deductions on their 2025 returns while the IRS updates forms and guidance.
Are tips and overtime still subject to Social Security and Medicare taxes?
Yes. OBBB doesn’t change FICA or FUTA wage definitions — tips and overtime are still subject to Social Security, Medicare, and federal unemployment taxes.
Does this apply to exempt salaried employees?
Generally no, in the case of overtime-exempt employees as they don’t receive FLSA overtime. However, they may still qualify for the tip deduction if they’re in a recognized tipping role and meet the criteria.
Does OBBB apply to independent contractors?
Generally, no. OBBB deductions are aimed at employees with wages reported on a W-2. Independent contractors file on 1099 and don’t fall under FLSA overtime rules the same way, so watch for misclassifications.
What happens if overtime or tips are misclassified?
Employees may lose deductions they’re entitled to and employers risk inaccurate W-2s or other tax reporting forms, which can create issues in audits or IRS follow-up.
Will there be changes to the W-2?
Yes. The IRS has signaled new or revised reporting so employers can separately report qualified tips, qualified overtime, and the employee’s occupation where tip income is a factor.
Who inside the organization should “own” OBBB implementation?
Treat it as a shared project between HR/payroll, finance, and whoever owns your time and attendance tracking systems. Payroll can’t do it alone if your time tracking doesn’t separate FLSA overtime and tips correctly, and IT/operations can’t reconfigure systems without HR and finance weighing in on rules and risk.
What should employees do if their tip or overtime reporting doesn’t look right?
Review paystubs, raise discrepancies with HR or payroll early, keep basic records, and use IRS tools or a tax professional, especially in the first year these deductions apply.
Once you’ve addressed the “what” and the “does this apply to me?” questions, the next step is translating OBBB into your reality.
How OBBB impacts your payroll and time tracking
This is where OBBB lands on your desk. The law may target employees’ taxable income, but organizations are the ones who have to track, categorize, and report wages in a way that makes the math work.
What isn’t changing under OBBB
First: OBBB does not rewrite the payroll tax rulebook.
- Tips and overtime are still wages for Social Security, Medicare, and FUTA.
- Continue calculating and remitting those taxes just as you always have.
- The OBBB provisions live on the income tax side, not the payroll tax side.
If you see anyone claiming that tips or overtime are “tax-free now,” they’re talking about a shorthand version of the income tax deduction, not the actual treatment of those wages in payroll.
Second: OBB does not mean an immediate shift in withholding.
For tax year 2025, employers will generally continue to use current federal income tax withholding tables for tips and overtime. There’s no need to “pre-apply” new deductions in withholding unless and until IRS guidance explicitly allows. Instead, focus on capturing accurate, granular wage data with your time tracking software so that employees and the IRS can rely on what shows up on W-2s and information returns.
The IRS has provided transition relief to give employers time to adapt systems and processes. The pressure is less about recalculating net pay today and more about getting the data structure right for the long term.
What is changing under OBBB
The biggest operational shift is new employer reporting requirements.
Under OBBB, employers and other payors will be required to track and separately report the total amount of qualified tips paid to each employee (plus the occupation of that employee), along with the total amount of qualified overtime compensation (FLSA overtime premium) paid during the year.
That means:
- Updated W-2 instructions with potentially new boxes or codes for tips and overtime.
- Updated electronic filing formats from your payroll provider.
Now more than ever, you need clean data that flows from time tracking → payroll → W-2 to avoid manual rework. If you’ve ever tried to rebuild hours or tips from scratch for a wage claim or audit, you know how important this level of structure and traceability will be.
What employers and employees should do about OBBB
Thankfully, you don’t have to solve every implementation detail at once. There are concrete steps both employers and employees can take to make OBBB work for them instead of against them.
OBBB next steps: employers
For HR, payroll, finance, and operations leaders, treat OBBB as a prompt to shore up your wage data model.
| Step & action | How to do it |
|---|---|
| Step 1: Re-evaluate your pay codes | Separate FLSA overtime premium from other overtime or enhanced pay types. Create or adjust OT codes so they map cleanly to IRS and FLSA definitions. |
| Step 2: Audit tip reporting | Confirm tips are captured as tips — not lumped into wages or service charges. Ensure your system stores employee occupation with tip data. |
| Step 3: Prepare for updated W-2s | Work with your payroll provider to map any new or revised fields. Make sure the path from time tracking → payroll → W-2 doesn’t rely on time tracking spreadsheets. |
| Step 4: Clean up integrations | Validate API mappings or file exports between time & attendance, scheduling, payroll, and HR systems. Confirm tip and OT categories transfer consistently. |
| Step 5: Strengthen audit trails | Require reason codes or notes when timecards are edited. Track overrides, corrections, and approvals so you can explain how final numbers were reached. |
| Step 6: Train your managers | Teach supervisors how overtime is classified and why it matters. Call out how shift swaps, role changes, and rate changes affect FLSA overtime. |
| Step 7: Communicate with employees | Explain in plain terms how the tip and overtime deductions work. Reinforce why accurate clock-ins, tip reporting, and job codes matter for their taxes. |
| Step 8: Stay ahead of IRS updates | Monitor IRS releases on OBBB implementation, especially around forms and withholding. Build a process to review and apply updates with your providers. |
Again, none of this has to be done overnight. But the earlier you start, the more room you have to make careful, deliberate changes instead of rushing at year-end.
OBBB next steps: employees
Employees also have a role to play, especially those whose income depends heavily on tips and overtime.
| Step & action | How to do it |
|---|---|
| Step 1: Report all tips accurately | Follow your employer’s tip reporting process every shift. Avoid rounding or guessing, as your reported tips drive both pay and potential tax deductions. |
| Step 2: Review paystubs for overtime | Check that overtime is listed clearly and separately from regular hours. Ask questions if any “extra pay” doesn’t line up with how FLSA overtime should work. |
| Step 3: Keep basic documentation | Save year-end paystubs, employer summaries, and any required tip logs. These records help if there are questions later about income or deductions. |
| Step 4: Confirm filing requirements | If you’re married, you’ll generally need to file jointly to claim these deductions. Make sure your SSN is correct on forms, and your household paperwork is in order. |
| Step 5: Know the income limits | Be aware that if your household income is above $150k / $300k, your deduction may phase out. |
| Step 6: Get help if you need it | Use IRS resources or a tax professional, especially in the first year, to apply the new tip and overtime deductions correctly. |
Employers can make this easier by offering clear communication and easy access to pay and time data throughout the year.
Prepare your time tracking and payroll for OBBB
OBBB doesn’t change the essential job of time tracking. You still need to know who worked, when, where, and at what rate. It does, however, make it more important to understand how your current systems handle those details, and where they stop.
As you look ahead:
☑ Make sure you know exactly which types of overtime your time tracking and payroll systems calculate out of the box (FLSA weekly overtime, blended rates, etc.).
☑ Map out where your reality goes beyond that — daily overtime rules, double-time, union rules, special differentials, or manual adjustments managers make on the fly.
☑ Decide how each of those non-standard scenarios will be handled for both pay and reporting, so you’re not surprised at year-end when you need to separate FLSA overtime premiums from everything else.
You don’t need a perfect system to handle every edge case automatically.
You do need a clear picture of what your systems and processes cover, what they don’t, and a documented plan for every form of overtime and tip reporting that shows up in your workforce. The more intentional you are about that now, the easier OBBB will be to follow when the reporting and reconciliation work starts.
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