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On July 4th, President Trump signed H.R.1 - One Big Beautiful Bill Act (OBBB) into law. This budget reconciliation bill includes numerous provisions.

However, despite the scope of bill, there will be no direct and immediate impact on employees’ paychecks. In addition, there are no additional steps for employers to take to manage their payroll.

Many aspects of the OBBB extend tax provisions first introduced in the Tax Cuts and Job Act (TCJA). Signed into law in 2017, the cuts introduced in the TCJA bill would have expired at the end of 2025, if not for the OBBB.

In addition to extending certain tax provisions, the OBBB also introduces other changes. Two of the more publicized changes includes no taxes on tips and on overtime pay. Both provisions are in effect as of January 1, 2025. They are set to expire on December 31, 2028.

Below is a quick recap at each of these aspects:

 

No Tax on Tips

Employees can deduct up to $25,000 per year in qualified tips from their federal taxable income.

This deduction is reduced by $100 for each $1,000 that the individual’s modified adjusted gross income exceeds $150,000. For joint filers, this amount is $300,000.

Qualified tips mean any cash tips “received by an individual in an occupation which customarily and regularly received tips” as of December 31, 2024. For the purposes of this act, “cash” tips also include those charged as well as those received from a tip-sharing arrangement.

 

No Tax on Overtime Pay

Employees can deduct up to $12,500 (or $25,000 for joint filers) in qualified overtime wages.

As with the no tax on tips, this deduction is reduced by $100 for each $1,000 that the individual’s modified adjusted gross income exceeds $150,000. For joint filers, this amount is $300,000.

Qualified overtime wages refer to wages paid that exceed the regular rate of pay as required by the Fair Labor Standards Act (FLSA).

 

Additional Information

Both deductions are considered “above the line” deductions. This means employees can take them, regardless if they itemize their deductions or not.

In addition, The OBBB does not provide for any credit relief. Any employee who ordinarily would not owe any federal income tax will not receive a refund because of these new deductions.

These deductions also only apply to federal income tax withholding. There are no changes to Medicare or Social Security withholdings. In addition, they may still be taxed per the employee’s state and/or local tax laws.

The above is simply a summary of key components of the recently passed One Big Beautiful Bill Act. You should consult with your financial and legal advisors on how any of the act’s provisions may impact you and your business.

 

Disclaimer: This is simply a summary of some provisions contained with the H.R.1 - One Big Beautiful Bill Act. This does not constitute legal advice. Always check with your own legal and/or financial advisors as to how this law and others may apply to you or your business.