New Tax Law Alert: What the “One Big Beautiful Bill Act” Means for Your Payroll

On July 4, 2025, the One Big Beautiful Bill Act (OBBBA) was signed into law, introducing sweeping changes to the U.S. tax code. While many provisions in the legislation will require additional clarification from the IRS, two key areas are already raising important questions for employees: taxation of tip income and overtime pay.

While these changes offer potential tax savings, it’s important to know that implementation will not be immediate. The IRS will issue further guidance in the coming months, and any adjustments to payroll withholding or W-2 reporting will depend on those instructions.

Here’s what we know so far:

Tip Income Deduction

If you work in a tipped occupation, you may soon be eligible to deduct up to $25,000 of qualified tip income on your tax return.

1. New W-2 and 1040 reporting: Expect changes to how your wages are reported at year-end.
2. Eligible jobs: The IRS will publish a list of qualifying tipped occupations by October 2025.
3. Income limits apply: The deduction phases out beginning at $150,000 in modified adjusted gross income (or $300,000 for joint filers).
4. Employment taxes remain: Tip income will still be subject to Social Security and Medicare taxes.

Overtime Income Deduction

You may also be able to deduct up to $12,500 in qualifying overtime pay (or $25,000 if filing jointly).

1. Limited to premium pay: Only the premium portion of overtime—defined under the Fair Labor Standards Act (FLSA)—qualifies.
   • Example: A non-salaried worker earning $10/hour receives $15/hour for overtime. The $5 extra is the deductible portion.
2. Reported on your 1040: Like the tip deduction, this benefit will be claimed when you file your taxes.
3. Income limits apply: The same $150,000/$300,000 phaseout thresholds apply as mentioned before.
4. Still subject to payroll taxes: Overtime earnings will continue to be taxed for Medicare and Social Security.

What Comes Next?

At this time, no changes will be made to your E1 paychecks or W-2s. We are closely monitoring developments and will update you once the IRS releases formal guidance.

We want the opportunity to serve you and your company with personalized, Katy-based HR and compliance support. Call us today at 281-492-9292 or email us at sales@eosg.com to find out how we can help you.