The One Big Beautiful Bill (OBBB) introduced two major federal tax changes impacting payroll, HR compliance, and employee tax planning: the No Tax on Tips and No Tax on Overtime provisions. 

While the IRS and Treasury Department are still issuing guidance, employers should begin preparing now to adjust W-2 reporting and employee communication strategies. Here’s what HR professionals and payroll teams need to know. 

Federal Tax Deduction for Tips: Key Employer Guidelines 

The “No Tax on Tips” provision allows employees to deduct up to $25,000 in qualifying tip income annually on their personal tax return. This does not eliminate payroll tax withholding—employers must continue standard withholding procedures for all tip income. 

Tip Deduction Compliance Highlights: 

• Applies only to voluntary tips (not mandatory service charges). 

• Covers cash, credit card, and electronic tips. 

• Employees must work in customarily tipped occupations (official list pending). 

• Individuals must have a valid Social Security Number to qualify. 

• Tip income must be accurately reported on employee W-2s. 

• Deduction phases out at $150,000 (single) and $300,000 (joint) adjusted gross income. 

• Provision expires after 2028, unless extended by Congress. 

HR Action Item: Prepare to flag eligible tip income on W-2s and update employee communications to clarify that the deduction is applied at tax filing, not in payroll. 

Overtime Tax Deduction: What Qualifies and What Doesn’t 

The “No Tax on Overtime” provision allows employees to deduct up to $12,500 (individual) or $25,000 (joint) for overtime premiums paid under the Fair Labor Standards Act (FLSA). As with the tips deduction, the benefit is applied when filing personal taxes. 

Overtime Deduction Requirements: 

• Applies only to the premium portion of FLSA overtime (typically the additional 50%). 

• Example: If an employee earns $20/hour and receives $30/hour for overtime, only the $10/hour premium qualifies. 

• Non-FLSA-based time-and-a-half policies are not eligible. 

• No double-dipping: Employees may not claim the same income under both tip and OT deductions. 

• Employees must have a valid SSN and overtime premiums must be reported on the W-2. 

• Subject to the same income phase-out as the tips deduction. 

HR Action Item: Ensure payroll systems are capturing FLSA-based OT premiums separately to support accurate W-2 reporting. 

When Do These Tax Changes Take Effect? 

These federal tax deductions are currently in effect for 2025. The IRS may issue revised W-4 worksheets or additional guidance, but employers should begin preparing now for accurate year-end wage reporting. 

The program is set to expire in 2028, though future legislation could extend it. 

What HR and Payroll Leaders Should Do Now 

Even without immediate changes to withholding, this law introduces new compliance and reporting complexity. Here’s how to get ahead: 

• Review tip and overtime tracking practices for W-2 readiness 

• Educate managers and frontline teams on eligibility criteria 

• Begin updating employee FAQs and onboarding content 

• Monitor IRS and Treasury updates for form or worksheet changes 

Partner With MP for Proactive Payroll Compliance 

At MP, we don’t just process payroll—we help HR teams stay compliant, strategic, and ahead of federal tax law changes. Our expert team delivers: 

• 100% on-time payroll implementation 

• Personalized support (no call center runaround) 

• Compliance guidance built for real-world HR teams 

Ready to eliminate vendor frustrations and upgrade your payroll experience? 
Visit mp-hr.com to see how MP helps HR professionals simplify compliance and stay ahead of the curve. 

Make sure to subscribe to MP’s blog and stay on top of the most up-to-date news and trends in the business realm.