On July 4, 2025, the landscape of American payroll changed overnight. The signing of the One Big Beautiful Bill Act (OBBBA) delivered on a major promise to the workforce: "No Tax on Overtime" and "No Tax on Tips."
The new law doesn't just ask you to change a tax table. It asks you to fundamentally rethink how you classify, calculate, and communicate compensation.
At ONEHCM, we believe that compliance isn't just about avoiding penalties—it's an opportunity for Human Connection Management. How you handle this transition will either build deep trust with your workforce or create confusion that erodes engagement.
Here is the high-level guide to what the OBBBA means for your organization and how to turn this regulatory hurdle into a culture win.
The OBBBA is a federal law designed to increase take-home pay by making certain overtime premiums and tips tax-deductible on a worker’s personal income tax return. While the "No Tax" slogans are the headline, the IRS has defined very specific "Qualified" criteria for both.
Under the OBBBA, the deduction applies strictly to the overtime premium mandated by Section 7 of the Fair Labor Standards Act (FLSA).
Tipped workers can now deduct qualified tips from their federal income tax.
What Has Actually Changed?
The concept is simple, but the execution requires precision. Here's the breakdown of the new standards:
| Feature | Qualified Overtime | Qualified Tips |
| Annual Deduction Cap | $12,500 ($25,000 Joint) | $25,000 (Per Return) |
| MAGI Phase-Out | Starts at $150k ($300k Joint) | Starts at $150k ($300k Joint) |
| Tax Type Impact | Federal Income Tax Only | Federal Income Tax Only |
| Payroll Taxes | Still subject to FICA/Medicare | Still subject to FICA/Medicare |
Even qualified overtime has boundaries:
Annual Caps: You can deduct a maximum of $12,500 per year (Single) or $25,000 (Married Filing Jointly). For tips, the maximum is $25,000 per return.
Income Phase-Out: The deductions begin to decrease if Modified Adjusted Gross Income (MAGI) exceeds $150,000 (Single) or $300,000 (Joint). It disappears entirely for high earners.
Federal Tax Only: Deductions apply only to Federal Income Tax. Social Security and Medicare (FICA) taxes must still be paid on the full amount.
Not all extra pay qualifies. If you rely on legacy systems or spreadsheets, these nuances present a significant risk:
State vs. Federal: Overtime required only by state law (like California’s daily 8-hour rule) does not qualify unless the employee also exceeds 40 hours for the week.
Contractual Premiums: "Double time" for Sundays or holidays (unless over 40 hours) is viewed as a voluntary bonus, not qualified FLSA overtime.
Exempt Employees: Any "extra" pay given to salaried, exempt managers does not qualify for the deduction.
The IRS recognizes that payroll systems cannot change instantly, providing a tiered implementation period:
For the 2025 tax year (filed in early 2026), the IRS allows reasonable methods" to estimate the deduction. You will not see a special box on the 2025 W-2; employees will instead use IRS formulas (like the "One Third Rule") or separate statements from their employer to claim the deduction.
Under Notice 2025-62 (issued Nov 5, 2025), employers will NOT face penalties for failing to separately report the new required information for 2025.
What is ONEHCM doing to help?
How to do this in OnePoint: Run the Earning/Deduction/Tax Listing (Summary) and filter to show all overtime and doubletime earnings by employee. Add a custom column to calculate the total premium amount for each employee.
How to do this in OnePoint: Run the Earning/Deduction/Tax Listing (Summary) and filter to show all tip earnings by employee.
Resources: View the official list of occupation codes here.
Starting January 1, 2026, the training wheels come off. Draft instructions for the 2026 Form W-2 require:
What is ONEHCM doing to help?
In the era of Human Connection Management, we move beyond seeing employees as "capital" to be managed and start treating them as partners to be supported. The OBBBA is a perfect test case for this philosophy.
Employees will be confused. They will ask, "Why didn't my Sunday double-time count?" or "How do I know my tips are being reported correctly for my deduction?" If your HR team can't answer, trust wavers.
Because ONEHCM unifies Time & Attendance, HR, and Payroll into a single database, we don't lose data in translation.
Built-in worksheets for modeling compensation scenarios: ONEHCM provides configurable planning worksheets that let you simulate different overtime patterns, bonus structures, shift differentials, and tipped income scenarios. You can see the impact of state vs. FLSA interactions before you ever run payroll.
Incident tracking: Because all overtime, tips, bonuses, and schedule changes live on a single employee record, ONEHCM gives you a clear audit trail for every pay-impacting event.
Forget the spreadsheets. The OBBBA requires calculating "Qualified" amounts that differ from gross pay. ONEHCM’s payroll engine automates these nuanced calculations:
Weighted Average & Bonus Blending: When you pay a performance bonus or shift differential, our system automatically recalculates the "Regular Rate of Pay" to identify the exact 0.5x premium required for Box 12, Code TT.
Tip Categorization: Our system distinguishes between voluntary tips (qualified for Box 12, Code TP) and mandatory service charges (non-qualified), ensuring your tipped workforce receives every cent of the tax deduction they are legally owed without manual intervention.
The ultimate goal of Human Connection Management is relational trust.
Smart Pay Stubs: ONEHCM allows you to deliver clear, transparent pay statements that show employees exactly what is happening with their pay.
Empowerment: By providing accurate data, you empower your employees to file their taxes with confidence, reinforcing that their employer is looking out for their financial well-being.
The One Big Beautiful Bill is complex, but it doesn't have to be chaotic. By leveraging unified technology, you can protect your organization from compliance risks while delivering a tangible financial win to your people.
When payroll, time, and HR data live in one system, you gain the precision needed to:
Separate FLSA-qualified premiums from state or contractual overtime.
Accurately track qualified tips versus service charges.
Produce the exact Code TT and Code TP amounts required on every W-2.
That accuracy translates directly into clearer pay statements, better-informed employees, and higher confidence, turning a high-stakes regulatory shift into a chance to demonstrate that you are safeguarding both your organization and your employees’ take-home pay.
Ready to see how ONEHCM can simplify your OBBBA transition? Request a demo today!