Labor & Employment Implications of the “One Big Beautiful Bill” for Employers

The One Big Beautiful Bill (also known as the One, Big, Beautiful Bill Act, P.L. 119-21), signed into law on July 4, 2025, contains a number of tax and spending changes, including significant new provisions affecting overtime pay, tips, and reporting obligations. This article outlines what employers need to know now and what to plan for, to stay compliant and manage risk.

Key Provisions Relevant to Overtime & Tips

1. “No Tax on Overtime” Deduction

• Effective for tax years 2025 through 2028, employees may deduct from their federal taxable income the portion of overtime pay that exceeds their regular rate of pay (i.e., the “extra half-time” premium in standard FLSA time-and-a-half pay) when overtime is mandated under the Fair Labor Standards Act (FLSA).  
• The maximum deduction amount: $12,500 for individual filers; $25,000 for married filing jointly.  
• The deduction phases out beginning with modified adjusted gross income (MAGI) over $150,000 (single) and $300,000 (joint).  

2. “No Tax on Tips” Deduction

• Employees who customarily and regularly receive tips are able, from 2025-2028, to deduct up to $25,000 of “qualified tips” (for joint filers) from their federal taxable income. Individual limits apply accordingly.  
• The law requires that employers report tips properly (e.g., via Form W-2 for employees).  

3. Temporary Nature of the Provisions

• These deductions are only in effect through December 31, 2028, unless extended or made permanent by subsequent legislation.  

What These Changes Are Not

Before discussing the impacts of the One Big, Beautiful Bill, it’s critical to understand what the new law does not do:

• It does not change the rules under the FLSA regarding who is eligible for overtime (e.g., it does not alter the exemption thresholds or duties tests under FLSA).  
• It does not exempt tips or overtime from payroll taxes (FICA, Medicare) or state and local income taxes; it only provides a federal income tax deduction for the qualifying amounts.  
• The deduction only applies to the portion of overtime pay in excess of the regular rate (i.e., the premium), not the full overtime wage.  

Considerations for Employers

Employers will see both opportunities and risk from these changes. Below are the impacts and what employer clients should be doing.

What Employers Should Do Right Now

1. Review and Update Payroll & Reporting Systems
   Make sure you can properly distinguish the overtime premium amounts and report them as required on W-2s (or 1099 as applicable). Engage payroll providers, HRIS systems, and tax teams to ensure seamless integration.

2. Educate Management & HR Staff
   Train those responsible for timekeeping, overtime approval, tip reporting, and classification so they understand both the deductions employees now have and your obligations.

3. Communicate with Employees
   Clear, accurate communication is critical. Employers may want to provide guidance to staff on how these deductions work (what is eligible, phase-outs, what isn’t included) to manage expectations and avoid misunderstanding or dissatisfaction.

4. Audit Job Classifications & Exempt Status
   Given possible increased interest in overtime, ensure that exempt/non-exempt employees are properly classified under FLSA’s duties and salary tests, to avoid risk of wage & hour litigation.

5. Coordinate with Legal & Tax Advisors
   Ensure your legal and tax teams are aligned so reporting and compliance strategy is cohesive. Monitor IRS rulemaking, Treasury guidance, and any litigation that may impact implementation.

6. Plan for Expiration / Sunset
   Because the deductions are temporary, build into budgets, compensation planning, and employee communications what happens after 2028, including possibly restoring prior practices or adjusting compensation structure accordingly.

Outlook & Strategic Considerations

• In industries with large numbers of overtime‐eligible employees (manufacturing, public safety, healthcare, hospitality), the law may shift the competitive landscape as employees look for employers who compensate well for overtime and tips. Employers in those sectors may gain recruiting advantage or may face increased demand for overtime shifts.
• At the same time, the new deductions might reduce the urgency employees feel to demand higher base wages (in some cases) but could also raise expectations of how overtime is rewarded.
• Employers may also need to consider whether their compensation philosophy should adjust, for example, by increasing base pay, offering shift differentials, enhancing tip reporting or tip pooling fairness, or making clearer policies around overtime approval.

Conclusion

The One Big Beautiful Bill introduces meaningful new tax deductions for employees with respect to overtime and tips, creating new obligations for employers around reporting, payroll, classification, and communication. While the deductions are employee-focused, the employer’s role in ensuring proper implementation and compliance is substantial. Companies that act proactively updating systems, training staff, auditing classifications, and communicating clearly will be best positioned to avoid legal risk and take advantage (indirectly) of the law’s effects on workforce motivation and retention.

Scott M. Zurakowski
330-497-0700
szurakowski@kwgd.com