From changes to tips and overtime to new reporting rules, here’s how the OBBBA impacts your payroll process.

When the One Big Beautiful Bill Act (OBBBA) was signed into law on July 4, 2025, it introduced several changes to payroll taxation and reporting. While the legislation spans many areas, one provision has captured attention: temporary tax relief for tips and overtime pay. 

For employers, the headlines only tell part of the story. Behind them are new reporting rules, compliance deadlines and payroll adjustments requiring careful planning. 

Overview of the OBBBA 

The OBBBA applies to tax years beginning after Dec. 31, 2024, with most provisions scheduled to sunset after Dec. 31, 2028. Key updates for employers include: 

  • Temporary tax relief on tips and overtime pay 
  • Expanded employer reporting requirements 

No Tax on Qualified Tips 

Employees in qualified tipped occupations can claim an above-the-line deduction of up to $25,000 for qualified tips received between 2025 and 2028. Qualified is the keyword here.  

What are qualified tips? Qualified tips are voluntary cash or charged tips received directly from customers or through tip sharing according to the IRS. Auto-gratuities and service charges are not considered qualified tips.  

The IRS is set to issue guidance by Oct. 2, 2025 on the list of occupations that “customarily and regularly” received tips on or before Dec. 31, 2024. In the meantime, if you’re an employer in a tipped industry outside of food service and restaurants, contact an Adams Brown advisor.  

Employers must continue reporting tip income. The IRS has already stated there won’t be a new Form W-2 for 2025.  

The IRS will also provide transition relief to employers and payors subject to the new reporting requirements as well as taxpayers claiming the deduction in the 2025 tax year.  

No Tax on Qualified Overtime Compensation 

The OBBBA also provides relief for overtime pay. Qualified overtime pay mandated by the Fair Labor Standards Act (FLSA) that exceeds an employee’s regular rate qualifies for a deduction of up to $12,500 for individuals and $25,000 for joint filers. Qualified is the keyword here, too. 

The deduction is for pay exceeding employees’ regular rate of pay. This is essentially, the “half” portion of “time and a half.” State and local requirements and contractual overtime that are not FLSA-required will be ineligible for the deduction. 

Employers must still report total overtime compensation on Form W-2.  

New Reporting Requirements 

Employers will need to make payroll adjustments once IRS guidance is released. The expected changes include: 

  • Report total overtime pay and tip income separately on W-2s 
  • Adopt standardized payroll reporting formats for multi-state compliance 

Note: The IRS will not update withholding rates in 2025. Employers should communicate this clearly to employees who may expect changes in their paycheck withholdings. 

Compliance Deadlines & Penalties  

  • IRS guidance deadline: Oct. 2, 2025 
  • Effective date: Retroactive to Jan. 1, 2025 
  • Transition relief: Applies in the first year of implementation 
  • Penalties: Employers who fail to comply may face IRS penalties and create tax filing complications for employees if W-2s do not include the required details. 

Action Steps for Employers 

  • Update payroll systems to capture and report tips and overtime separately. 
  • Train HR and payroll staff on new compliance requirements. 
  • Communicate changes to employees, especially those in tipped roles. 
  • If you are a self employed individual that meet the qualifications and receive tips, contact an Adams Brown advisor. 

Special Note on Outdated Payroll Software 

If you’ve purchased your own accounting and payroll software, make sure to check with the vendor or your Adams Brown advisor to learn about their plan for updating the software to include OBBBA provisions. 

Most software requires regular updates. If your accounting and payroll software is outdated, you may have to use manual workarounds resulting in higher compliance risk. 

The Adams Brown team can help you select and implement the right accounting and payroll platform.   

Questions? 

The OBBBA introduces major payroll changes that require action. Start planning now to update systems, train staff and communicate with employees. For support and guidance navigating these changes, contact an Adams Brown advisor.