What Employers Need to Know about the OBBBA

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, introduces two temporary individual tax deductions that impact payroll reporting and employer responsibilities. These deductions covering qualified tips and overtime pay are effective January 1, 2025, through December 31, 2028.

To support these deductions, employers must report additional information on Form W-2, including the amount of qualified tips, employees occupation,  and overtime wages.

No Tax on Tips

Individuals can exclude qualified tips from gross income for federal income tax purposes. This exclusion is an above-the-line deduction claimed on the employee’s federal income tax return. It is capped at $25,000 and begins phasing out as modified adjusted gross income exceeds $150,000 ($300,000 for married filing jointly).

Qualified tips are voluntary tips received in occupations listed by the IRS as customarily receiving tips. This includes tip-sharing agreements, but not mandatory service charges such as an 18% automatic gratuity. The Secretary of the Treasury has until early October to identify those occupations that will qualify.

Tips will remain subject to tax withholdings for federal income tax as well as FICA tax, although employees may need to update Form W-4 in anticipation of the tip deduction.

No Tax on Overtime

Eligible employees can exclude qualified overtime wages paid pursuant to the Fair Labor Standards Act (FLSA) for federal income tax purposes. Similar to the tip provision, this exclusion is an above-the-line deduction claimed on the employee’s federal income tax return. The deduction is capped at $12,500 for single filers and $25,000 for joint filers and begins phasing out as modified adjusted gross income exceeds $150,000 ($300,000 for married filing jointly).

Qualified overtime wages is compensation paid to nonexempt workers as required by Section 7 of the FLSA. The deduction only applies to the overtime premium (i.e. the compensation paid in excess of the employee’s regular rate of pay).

Similar to the tip provision, the withholding requirements for overtime pay are not changing. Overtime wages remain subject to federal and FICA withholding; however, employees may need to update Form W-4 in anticipation of the overtime deduction.

Bottom Line for Employers

• Tips should continue to be reported to the employer and processed through the payroll system. Tips remain subject to federal income tax and FICA tax withholdings.
• Overtime wages remain subject to federal income tax and FICA tax withholdings.
• New W-2 reporting requirements include:
  • Qualified tip amounts
  • Employee’s occupation
  • Qualified overtime wages

We will continue to monitor the new law as the Internal Revenue Service publishes guidance.   Our full overview of the OBBBA can be found here – The One Big Beautiful Bill Recap. If you have any questions or thoughts, please do not hesitate to reach out to your Wilkins Miller advisor, and we can discuss how these changes may impact you and your specific situation.