What Employers Need to Know About the “One Big Beautiful Bill” and Payroll Wages

On July 4, 2025, President Trump signed into law the One Big Beautiful Bill (OBBB)—a sweeping legislative package that includes temporary federal tax deductions related to employee tips and overtime. Since its passage, we've received a number of questions about what this means for payroll. Here’s what we know so far.

No Tax on Tips & Overtime – But Not at the Paycheck Level

Two headline provisions in the OBBB are generating buzz:

• “No Tax on Tips”

• “No Tax on Overtime”

While these sound like immediate changes to employee paychecks, it’s important to note there is no change to payroll withholding at this time. Employees will not see a difference in their net pay through payroll in 2025.

However, employees will be able to deduct certain tip and overtime earnings when filing their personal income taxes, starting with the 2025 tax year. These deductions are available from 2025 through 2028, unless extended by Congress.

What Employers Need to Do

The law requires employers to report the total amount of qualified Tip income and Overtime premium pay as separate items on employee W-2 forms.

For Ahola clients, we are closely monitoring federal guidance and will make any necessary updates to tax withholding, reporting formats, or forms, including W-2 and W-4, as they are released.

What the Deductions Mean for Employees

• Tips: Eligible tipped employees (such as servers, bartenders, stylists, etc.) earning up to $150,000 individually or $300,000 jointly may deduct up to $25,000 in reported tip income from their taxable income.

• Overtime: Eligible hourly employees (those covered under the Fair Labor Standards Act) may deduct up to $12,500 in overtime premium pay annually, or up to $25,000 for joint filers.

These deductions:

• Are claimed on individual tax returns (Form 1040) starting with the 2025 tax year

• Do not impact payroll taxes (e.g., Social Security and Medicare, state withholding, local withholding). 

• Apply only to premium overtime pay, not base wages

What’s Next

The IRS is expected to issue additional guidance on:

• Updates to Form W-2 reporting for 2025

• Eligibility criteria for the tip deduction

• Potential changes to Form W-4 and federal tax tables in 2026

For Ahola clients, we'll continue to monitor all developments and implement system changes as needed. We’ll keep you informed of any action items required to stay compliant.

If you have questions, don’t hesitate to reach out to our team .