On July 4, 2025, the One Big Beautiful Bill Act (H.R.1) was signed into law, introducing sweeping changes to the tax code with significant implications for payroll and employment tax compliance. The Outsourced Accounting and Advisory practice at Brown Edwards is here to help clients understand how these changes affect their payroll processes and employee compensation strategies.
Here are the key payroll-related provisions you should be aware of:
“No Tax on Tips” Deduction
Effective 2025–2028, employees and self-employed individuals in tip-based occupations may deduct up to $25,000 in qualified tips from their federal income taxes.
- Eligibility: Applies to occupations the IRS deems as “customarily and regularly receiving tips” as of December 31, 2024.
- Reporting Requirements: Employers must report qualified tips and the recipient’s occupation on W-2s or other specified forms.
- Phase-Out: Begins at $150,000 MAGI for individuals and $300,000 for joint filers.
- Exclusions: Employees and self-employed individuals in Specified Service Trades or Businesses (SSTBs) under Section 199A are not eligible.
“No Tax on Overtime” Deduction
Also effective 2025–2028, employees can deduct the “half portion” of their time-and-a-half overtime pay from federal income taxes.
- Deduction Limit: Up to $12,500 for individuals and $25,000 for joint filers.
- Eligibility: Applies to overtime pay required under the Fair Labor Standards Act (FLSA).
- Reporting: Employers must report total qualified overtime compensation on year-end tax forms.
- Phase-Out: Same income thresholds as the tip deduction.
Employer Action Items
To stay compliant and support employees in maximizing these deductions, employers should:
- Update payroll systems to track and report qualified tips and overtime separately.
- Train payroll staff on new reporting requirements and deduction eligibility.
- Communicate with employees about how these changes may impact their take-home pay and tax filings.
- Monitor IRS guidance, expected by October 2025, for the official list of eligible tip-based occupations and further implementation details.
These provisions present a unique opportunity for employers to enhance employee compensation strategies while ensuring compliance with new federal requirements. As always, proactive planning and clear communication will be key.