[FREE GUIDES] The Big Beautiful Bill: Key Tax Changes for Employers and Employees

Starting in 2025, the One Big Beautiful Bill Act (OBBBA) introduced two federal tax deductions that affect workers who earn tips or overtime pay. The OBBBA allows qualifying workers to deduct certain tip income and overtime premium amounts from taxable income. Deductions are claimed on the employee’s individual tax return, and these changes apply to tax years 2025–2028.

While employer payroll tax obligations remain unchanged, there are steps employers can take to support compliance and employee readiness. By acting early, employers can reduce risk, simplify future reporting requirements, and position themselves as proactive partners in helping their workforce navigate these new tax benefits.

This blog covers what these tax changes mean for employers and employees, including key provisions of the OBBBA, practical steps for compliance, and strategies to help your workforce prepare for tax season.

We've also included two free guides curated by BBSI Payroll Specialists that you can download now.

Two Key Provisions of the OBBBA

1) Tip Income Deduction

The OBBBA states that employees in occupations that customarily receive tips (restaurant servers, bartenders, salon professionals, hotel staff, delivery drivers) may deduct up to $25,000 in qualified tips per year.

Qualified tips generally include voluntary cash, charged tips, and pooled or shared tips. Automatic gratuities and service charges do not qualify for deduction. The deductions are subject to income-based phaseouts for high-earners, per IRS guidance.

For Example: An employee with $18,000 in qualified reported tips for the year may deduct that amount from taxable income, subject to IRS rules and any income limits described in IRS guidance.

2) Overtime Premium Deduction

The OBBBA states that employees who work more than 40 hours in a workweek under the Fair Labor Standards Act (FLSA) may deduct the premium portion of overtime; that is, the extra 0.5× over their regular pay.

The maximum deduction is $12,500 per year for individuals, and $25,000 per year for joint filers. Only the portion attributable to FLSA-required overtime (hours over 40 in a workweek) are eligible. Additional state/local/contract overtime hours beyond the FLSA requirement generally do not qualify for deduction.

For Example: An employee’s regular rate of pay is $20/hour, making their overtime rate $30/hour. For 10 overtime hours, the deductible premium is $10/hour × 10 = $100. This is, of course, a simplified illustration and not tax advice.

The OBBBA’s Impact on Employers

Luckily for employers, payroll tax practices remain unchanged. The IRS will not penalize employers for failing to separately report qualified tips or overtime amounts on 2025 Forms W‑2/1099, and businesses should continue to withhold federal income tax, Social Security, and Medicare on wages, tips, and overtime as usual. The transition relief is limited to the new OBBA-specific separate reporting for tax year 2025 and does not change existing wage/tip reporting, withholding, and employment tax obligations.

However, it is recommended that business owners take proactive steps to ensure compliance and support employees, including verifying the accuracy of their payroll and timekeeping data, establishing streamlined reporting tools, and creating open lines of communication with employees who may benefit from the OBBBA’s provisions.

By taking these steps early, businesses can turn compliance into a competitive advantage and position themselves as proactive partners in navigating regulatory change.

Establish Reliable Data & Reporting

Business owners should verify that payroll and timekeeping systems are equipped to identify and report on voluntary tips, isolate them from non-deductible service charges, and track overtime premiums by employee, by week.

Start by verifying the accuracy of payroll and timekeeping data, particularly for voluntary tips and overtime premiums, since these figures will directly impact employees’ ability to claim deductions.

Business owners may also consider upgrading or configuring payroll systems to isolate qualified tips from non-deductible service charges and to track overtime premiums separately from straight-time pay.

Implementing streamlined reporting tools now will make it easier for businesses to adapt when new IRS reporting fields are introduced in 2026.

Communicate with Employees

Employers should establish clear channels for sharing year-end summaries or periodic reports with employees, helping them prepare for tax filing and avoid confusion. Transparent practices not only reduce the risk of errors but also build trust and demonstrate a commitment to employee financial well-being.

While the IRS has outlined methods employees can use in 2025 to determine their deductions when employers do not separately report overtime and/or tips, businesses that do provide employees with year‑end summaries of tip totals and FLSA overtime premium amounts give their employees an advantage come tax season.

Employers may share overtime and voluntary tip information using W‑2 Box 14 entries or separate statements.

Preparing Employees for OBBBA Tax Filing

Business owners can choose to provide additional guidance to their employees, particularly if their workforce is likely to be impacted by the OBBBA. This rings true for businesses in the food service industry, or those in construction or trades where overtime is frequent.

Employers who provide proactive guidance and transparent reporting not only help their teams succeed but also reinforce trust and confidence within the workplace, turning compliance into a shared advantage.

Employees who received tips or overtime in 2025 can take the following steps when preparing their returns:

Step 1. Gather Records

• Tips: Review your W‑2 (Box 7: Social Security tips) if applicable, monthly tip reports (Form 4070), and any employer statements summarizing tips.
• Overtime: Use final pay stubs or employer summaries that identify overtime premium amounts (the extra 0.5×).

Step 2. Understand What Qualifies

• Tips: Voluntary tips (cash/charged, pooled/shared) may qualify. Automatic gratuities/service charges do not.
• Overtime: Only the FLSA premium portion qualifies—not straight‑time or daily/state OT definitions.

Step 3. File Before the Deadline

• Follow IRS guidance for claiming deductions before April 15, and keep a copy of the tax return in case of audit.

By taking these steps, employees can position themselves to maximize the benefits of the OBBBA deductions and avoid unnecessary stress during tax season.

Free OBBBA Guides for Business Owners

Still have questions? Download BBSI's free guides to No Tax on Overtime and No Tax on Tips below, curated by BBSI's Payroll Specialists.

What’s Next for the OBBBA?

The One Big Beautiful Bill Act (OBBBA) introduces a phased approach to implementation, giving employers and employees time to adapt.

2025 serves as a transition year, during which the IRS has granted penalty relief for employers who use reasonable methods to provide tip and overtime information to their workforce. This flexibility is designed to ease the burden on businesses while ensuring employees have the data they need to claim deductions accurately.

In 2026, the landscape will shift as Forms W‑2 and 1099 are expected to include new fields for separately reporting qualified tips and overtime premium amounts. This change will standardize reporting and reduce ambiguity, but it also means employers should begin preparing now by upgrading payroll systems, refining timekeeping processes, and training staff on compliance requirements.

At BBSI, we’re here to help you navigate these changes with confidence. From streamlined payroll solutions to proactive compliance support, our goal is to make sure your business is prepared for what’s next. Together, we can turn regulatory shifts into opportunities for stronger operations and happier employees.