From Paychecks to Payroll, take a Deep Dive into the OBBBA

Welcome to Womble Perspectives, where today, we’re diving into a major new law that’s making waves in payroll departments and break rooms across the country.

It’s called the One Big Beautiful Bill Act, or OBBBA, and among other things, it introduces two powerful federal tax deductions that could significantly boost take-home pay for millions of Americans.

Read the article

• Unlocking Savings: New Tax Breaks for Overtime and Tips – What Employers Need to Know

About the authors

• Andreas Mosby
• Martha J. Zackin

Transcript

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Welcome to Womble Perspectives, where today, we’re diving into a major new law that’s making waves in payroll departments and break rooms across the country.

It’s called the One Big Beautiful Bill Act, or OBBBA, and among other things, it introduces two powerful federal tax deductions that could significantly boost take-home pay for millions of Americans:

·       The “No Tax on Overtime” provision

·       And the “No Tax on Tips” provision

These changes apply from 2025 through 2028, and they’re designed to give workers a break on the extra income they earn—whether it’s from clocking in long hours or collecting tips in a busy restaurant.

But while the benefits are clear, the law also brings new responsibilities for employers. So let’s break it all down.

Under the OBBBA, eligible employees can deduct up to $12,500 per year in qualified overtime pay from their federal taxable income. For joint filers, that number doubles to $25,000.

Now, what counts as “qualified” overtime? The law is very specific. It only includes the extra half-time premium required under the Fair Labor Standards Act. That means hours worked beyond 40 in a week for non-exempt employees.

So if your employer pays double-time or bonuses, those don’t qualify unless they’re also Fair Labor Standards Act -mandated. And if you’re an exempt employee—say, salaried and not eligible for overtime—this deduction doesn’t apply to you.

Here’s a key point: this deduction applies to federal income tax only. It does not affect payroll taxes like Social Security and Medicare, so employers must continue withholding and matching FICA taxes on overtime pay. The benefit comes later—when employees file their tax returns. For example, someone in the 22% tax bracket earning $5,000 in qualified overtime could save around $1,100 in federal income tax.

But don’t expect to see this reflected in your paycheck right away. The IRS won’t adjust withholding tables until 2026. So for 2025, employers should continue withholding as usual, and employees will see the benefit at tax time.

Now on to tips. The One Big Beautiful Bill Act allows tipped employees to deduct up to $25,000 per year in gratuity income from federal tax. That’s a huge win for workers in hospitality and service industries.

But again, not all tips qualify. Only voluntary tips—those left by customers or shared through tip pools—are eligible. Mandatory service charges or automatic gratuities? Not deductible.

And there’s another layer: the deduction is only available to workers in occupations that “customarily and regularly” receive tips. The Treasury Department will publish an official list by October 2, 2025, likely including waitstaff, bartenders, and hotel service staff.

Professionals in fields like law, healthcare, and consulting are explicitly excluded, even if they receive tips.

For employers, the Bill  introduces new reporting and compliance duties. Here’s what needs to happen:

·       Update payroll systems to separately track “qualified overtime” and “qualified tips.”

·       Prepare for new W-2 reporting requirements, likely with new boxes or codes.

·       For 2025, use reasonable estimates for qualified amounts—but document your methods carefully.

·       Continue withholding state income taxes, unless your state enacts similar exemptions.

·       Train managers and payroll staff to ensure accurate tracking and reporting. 

This is especially important in tipped environments, where distinguishing between qualified and non-qualified tips can get tricky. If tip pools include non-tipped roles like cooks, their share may not qualify unless their occupation is on the IRS list.

Beyond compliance, the OBBBA could influence employee behavior and compensation strategies. With overtime pay now more valuable, some employees may seek extra shifts. That’s good news for industries facing labor shortages—but employers still bear the cost of time-and-a-half pay.

In tipped industries, we might see a return to traditional tipping models over fixed service charges. And some exempt employees may even consider switching to non-exempt status to take advantage of the deduction—a move that requires careful planning.

So what should employers do now?

·       Start working with payroll providers to update systems.

·       Review timekeeping and tip reporting policies.

·       Coordinate with finance and HR to manage implementation.

·       Monitor IRS guidance and state legislation.

·       And most importantly, communicate clearly with employees about what to expect.

Thanks for joining us on Womble Perspectives. If you found this episode helpful, don’t forget to subscribe, share, and stay tuned for more insights on how the legal landscape continues to evolve.

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