On July 4, 2025, President Trump signed into law the H.R.1 – One Big Beautiful Bill Act (OBBB), a sweeping tax package that includes major changes to payroll operations. Two headline provisions—the elimination of federal income tax on tips and overtime pay—have captured national attention, but the bill also brings numerous technical and administrative changes that employers must be aware of.
The new legislation temporarily eliminates federal taxation on qualified tips and overtime pay through a deduction on an individual’s tax return, retroactive to January 1, 2025, through December 31, 2028.
Qualified Tips – Section 70201
The new tip deduction allows workers to deduct up to $25,000 annually from their federal taxable income. However, qualifying is not automatic.
To qualify:
- Tips must be cash-based, including credit card tips and pooled arrangements.
- Tips must be earned in occupations where tipping was customary as of December 31, 2024.
- The deduction is phased out by $100 for every $1,000 over $150,000 MAGI (or $300,000 for joint filers).
- Workers in specified service trades or businesses (as defined in Section 199A(d)(2)) cannot claim this deduction, even if they receive tips. This includes:
- Health
- Law
- Accounting
- Actuarial science
- Performing arts
- Consulting
- Athletics
- Financial services
- Investment management
- Brokerage, trading, and dealing in securities, commodities, partnership interests
The Treasury Department has 90 days from July 4 to publish the final list of qualifying occupations.
Payroll Requirement:
- W-2 forms must now include:
- Total amount of reported tips
- The employee’s qualifying occupation
- 2025 is a transitional period—employers may “approximate a separate accounting of amounts designated as cash tips by any reasonable method specified by the Secretary.”
Important Note:
Mandatory service charges and automatic gratuities do not qualify—only voluntary tips count.
Overtime – Section 70202: Only the Premium Counts
The overtime deduction is more nuanced.
Deduction Details:
- Workers may deduct up to $12,500 annually (or $25,000 for married couples).
- Only the premium portion of FLSA-required overtime qualifies.
- The deduction is reduced by $100 for each $1,000 over $150,000 MAGI ($300,000 joint).
Example:
- Employee earns $20/hour regular time
- Overtime rate is $30/hour
- Only the $10/hour premium is deductible—not the full $30/hour
Ineligible Overtime:
- State-mandated overtime beyond FLSA
- Union-negotiated overtime exceeding federal minimums
- Voluntary overtime payments by employers
Payroll Requirement:
- Employers must calculate and separately report the FLSA-mandated premium portion on W-2s.
- 2025 is a transitional year—employers may “approximate a separate accounting… by any reasonable method specified by the Secretary.”
Form 1099 Reporting Threshold Raised – Section 70433
Starting in 2026, the threshold for issuing Form 1099 increases:
| Form Type | Old Threshold | New Threshold | Indexed? |
|---|---|---|---|
| 1099-NEC/MISC | $600 | $2,000 | Yes, beginning in 2027 |
Payroll Requirement:
- Businesses must ensure their systems and reporting thresholds are updated accordingly.
Paid Family and Medical Leave (PFML) Credit – Section 70304
Section 70304 extends and enhances the PFML credit originally enacted under the TCJA.
Key Changes:
- The credit is now permanent.
- Tenure requirement is reduced to 6 months.
- Credit now applies to:
- Voluntary leave
- State- or locally-required leave
- Employers can choose to calculate the credit as:
- A percentage of wages paid during leave, or
- A percentage of premiums paid for insurance coverage of such leave
Payroll Requirement:
- Employers must decide whether to track wages or premiums and adjust systems accordingly.
Childcare Benefits Expanded – Section 70401
Childcare tax credits have been dramatically increased:
| Business Size | Max Credit Amount | Credit Rate |
|---|---|---|
| Standard | $500,000 | 40% of expenses |
| Small Biz | $600,000 | 50% of expenses |
| Definition: Small businesses have under $31M in gross receipts |
Additional Provisions:
- Applies to direct provider relationships or through intermediaries that contract with qualified child care facilities
- Applies to tax years after December 31, 2025
Employee Retention Credit (ERC) Enforcement – Section 70605
Stricter rules apply to COVID-era ERC claims:
- ERC claims for Q3/Q4 of 2021 filed after Jan 31, 2024 are disallowed
- A new six-year audit window applies
- New penalties for promoters/advisors who fail to exercise due diligence in advising ERC claims
Final Thoughts
The One Big Beautiful Bill Act may be making headlines for eliminating federal tax on tips and overtime, but for employers, the bigger impact lies in the technical requirements, recordkeeping, and compliance updates. From new W-2 fields to credit tracking elections, employers must stay proactive to remain compliant.
We will continue monitoring IRS and Treasury guidance, including upcoming clarifications on qualifying occupations, W-2 specifications, and safe harbor methods.