Tax insight

Employer impacts of tips and overtime pay changes in H.R. 1, the “One Big Beautiful Bill Act”

Insight
5 minute read
July 17, 2025

What happened?

The “One Big Beautiful Bill Act” (Act) created a temporary federal income tax deduction for individuals who receive certain qualified tip income and overtime compensation, effective for calendar years 2025 through 2028. For these purposes, "qualified tips" generally refers to tips received by individuals employed in occupations that customarily and regularly received tips prior to the 2025 calendar year. Qualified overtime compensation generally means overtime paid to an individual required under section 7 of the Fair Labor Standards Act of 1938 (FLSA). The deductions are phased out based on an individual’s modified adjusted gross income (AGI).

The Act also expands the Federal Insurance Contributions Act (FICA) tip credit available for certain businesses. Effective for tax years beginning after December 31, 2024, the FICA tip credit historically available only to the food and beverage industry is expanded to include beauty service businesses.

Why is it relevant?

The Act includes significant modifications to the tax treatment of tips and overtime pay. While the focus of these changes largely has been on the individual income tax deductions for this compensation, the Act also will have an impact on employers in industries with tipped workers or employees receiving overtime pay. The retroactive effective date of the provisions requires employers to take steps now to address these impacts.

Action to consider 

Employers will need to consider how to define tips and overtime pay for these purposes, implement new tracking mechanisms to separately account for these payments in payroll systems, monitor evolving reporting obligations, and manage employee communications. Employers already may track tips and overtime pay, but the Act likely will impose the need for separate earnings codes to facilitate 2025 reporting in connection with the new definitions of qualified tips and qualified overtime compensation. Given the time needed to implement technology solutions, employers should address administrative challenges efficiently by putting processes in place now to capture what must be reported to employees for 2025, pending IRS guidance.

With the retroactive effect of the temporary deduction for qualified tip and overtime compensation as of January 1, 2025, as well as the permanent expansion of the FICA tip credit for tax years beginning on and after January 1, 2025, employers should evaluate their current position to comply with the new reporting regimes. Early vendor management and coordination with respect to technology changes on Human Resources Information Systems (HRIS) platforms and job codes also can help companies to be well positioned to manage 2025 compliance requirement deadlines soon approaching in early 2026. Employee communications also will be an important component of implementation to prevent confusion over the operation of these new provisions in the Act.