New Tracking and Reporting Requirements for Employers in the OBBBA

What You Need to Know About the One Big Beautiful Bill Act (OBBBA)

The recently enacted One Big Beautiful Bill Act (OBBBA) introduces sweeping changes – but two provisions stand out for employers with tipped workers and those paying overtime:

• “No Tax on Tips”
• “No Tax on Overtime”

While the names sound generous, the reality is more nuanced. These changes don’t eliminate taxes; they create limited new deductions. Employers must prepare now to avoid reporting headaches and potential penalties.

“No Tax on Tips” – The Reality

Despite the name, this provision offers a deduction, not a tax holiday.

Who qualifies?

• Employees or self-employed workers in industries the IRS classifies as “customarily and regularly” tipped such as restaurant and hospitality roles
• A list is expected to be released in October 2025

Deduction amount:

• Up to $25,000 per year (phasing out above $150k Adjusted Gross Income (AGI) or $300k for joint filers).

Eligible tips:

• Cash tips, credit card tips, or tip-pool amounts reported on W-2/1099.

“No Tax on Overtime” – What’s Deductible

Well, not really “no tax” but a newly available deduction. This section allows workers to deduct the premium portion of overtime pay (the “½” in time-and-a-half), but only under federal FLSA weekly overtime rules.

Who qualifies?

• Employees earning overtime reported on W-2/1099 under FLSA.

Deduction amount:

• Up to $12,500 annually ($25,000 for joint filers), which phases out when the taxpayer’s AGI exceeds $150,000 or $300,000 if filing jointly.

Important for California employers:

• The OBBBA only references weekly federal overtime, not California’s daily overtime rules. Payroll systems will need careful adjustments to distinguish between the two.

What Employers Should Do Now

To comply with the OBBBA, employers should promptly:

1. Review Payroll Systems: Review and update systems to ensure separate tracking of qualified tips and the FLSA (weekly) “premium” portion of overtime compensation to ensure that only state tax withholding is applied to overtime.\
2. Coordinate with Vendors and Experts: Work with payroll providers, accountants, tax professionals and legal counsel to ensure proper systems are in place for compliant tracking and reporting.
3. Update Policies and Procedures: Review and update tip reporting practices, overtime calculations and payroll practices to ensure compliance with the OBBBA.
4. Train Managers and Staff: Equip managers, HR, and payroll teams to address employee questions without giving tax advice. Qualified personnel should be able to explain what the company will report and direct employees to their own tax professionals for personal guidance.
5. Watch for IRS Clarifications and Guidance: Stay alert for the list of qualifying tipped occupations (expected October 2025), technical reporting instructions and additional further guidance.

Transition Period & Penalties

The IRS may allow some flexibility reporting in 2025, but errors could still expose employers to penalties or employee disputes. Proactive planning is the best protection.

Let JorgensenHR Help You Stay Compliant

The OBBBA introduces complex requirements that most payroll systems aren’t ready to handle. JorgensenHR can guide you through updates, training, and compliance so you avoid costly mistakes.

Contact us today at info@jorgensenhr.com or 661-600-2070 to prepare your business for these changes.