Spoiler: It affects what shows up on your employees’ W-2s starting in 2025 — and they’re going to have questions.
Big tax legislation often feels like something accountants worry about, not HR teams. But the One Big Beautiful Bill (yes, that’s really its name) introduces two payroll-related deductions that might leave your employees wondering:
- “Why is my overtime tax-free now?”
- “Did I hear I don’t pay tax on tips anymore?”
The answer? Not exactly — but as the employer, you’ll be expected to know what changed and support your team accordingly. Here's the quick version of what matters and where to get more detail.
The One Big Beautiful Bill, in Plain Terms
Signed into law on July 4, the “One Big Beautiful Bill” (OBBB) introduced several individual and business tax updates. But only two directly affect HR and payroll:
- A new deduction for qualified overtime pay
- A new deduction for reported tip income
These deductions apply to employees, not employers, but you’ll still need to:
- Track them correctly
- Report them clearly on W-2s
- Answer employee questions confidently
Two Payroll-Related Changes HR Needs to Know
1. Overtime: Only the “Extra Half” Counts
Employees can deduct the premium portion of their overtime — that’s the “time-and-a-half” part over their normal rate.
Example: If someone earns $20/hour, and you pay $30/hour for overtime, only $10/hour is deductible — and only if you report it properly.
Why it matters: You’ll need to start tracking and separating qualified overtime for W-2 reporting in 2025. If you don’t, employees could miss out on this deduction.
Read our full breakdown on overtime reporting and next steps →
2. Tips: Yes, They’re Still Taxable
We’re already hearing it: “There’s no tax on tips anymore!” Not quite. There’s a new deduction available for qualified tips — but it’s not automatic, and employees still need to report their tips as usual.
Why it matters: Employees may assume tips are now exempt from taxes. HR should be ready to explain the actual rule and ensure accurate reporting continues.
Get clarity on tip deductions and what to tell your team →
What to Do Next
You don’t need to overhaul your payroll system just yet — but you do need to:
- Understand what counts as “qualified overtime” and “qualified tips”
- Work with payroll to report these separately in 2025
- Support your team with clear, correct information
We’ve broken down each change in its own blog with examples, reporting tips, and action items.
Read about the Overtime Rule →
Learn about the Tip Deduction →
