The One Big Beautiful Bill Act (OBBB) was signed into law on July 4, 2025, and it brings hefty tax changes that employers should keep in mind as the end of the year draws near. There have been significant changes to 1099 limits, overtime pay and tip pay.

While the 1099 changes won’t take effect until 2026, the payroll changes are retroactive to January 2025. It will take time and effort to update the payroll to resolve those changes by December 31, 2025.  The IRS is expected to have a revised W-4 form starting in 2026, with guidance potentially coming out in October 2025.

What to Do Now?

For now, keep processing payroll as you have been for 2025. Overtime and tips will still be taxable for payroll processing.

Qualified Overtime Deduction

The law defines “qualified overtime compensation” to include only overtime pay required under the Fair Labor Standards (FLSA) – this means hours worked over 40 in a week for non-exempt employees. Keep in mind that this change is currently effective for tax years 2025 through 2028.

The overtime reporting is specifically for the extra “half-time” premium wages for hours over 40 in a workweek. For example:

Sally makes $10.00 per hour and has 42 hours worked for the week. She qualified for 2 hours of overtime. Her overtime pay is $30.00 (2 hours × $15.00). For reporting purposes, the employer must track only the $10.00 overtime premium (2 hours × $5.00).

There are exceptions around some of the wages that don’t qualify:

• Overtime or additional pay not mandated by FLSA
• Extra pay for exempt employees does not qualify
• Additional pay under state daily-overtime law
• Union contracts that dictate overtime pay are calculated on a daily basis

For example:

If Sally worked 10 hours on Wednesday, but only worked 32 hours for the week, then those 2 hours of overtime pay that she will be paid based on the union contract do not qualify for the reporting. However, if she worked 42 hours for the week, those two hours do qualify.

In essence, the reporting only applies to the standard time-and-a-half overtime premium required by federal law.

Qualified Tips Deduction  

The qualified tip income reporting is targeting traditional tipping situations. A few situations to be aware of:

• Reportable tips must be voluntary (cash or credit card left by the customer or distributed through tip pools)
• Mandatory service charges or automatic gratuities do not qualify
• The employee should be customarily and regularly receiving tip income. We are awaiting a published list of qualified occupations, hopefully by October 2025, to be provided by the Treasury Department. An example of the likely qualified occupations will be waitstaff and bartenders
• OBBB specifies that professionals working in a Specified Service Trade or Business such as law, accounting, healthcare and consulting are excluded from the tip reporting

This additional reporting of qualified tip income for each employee will likely appear as a new box on form W-2 for 2025.

For 2025, there is a transition rule that will allow employers to approximate the qualified tip income by reasonable method, but employers should be sure to document the method. Employers will need to ensure all tips are properly recorded as these figures will be used to determine employee deduction eligibility. Employees should make sure they are reporting 100% of their tips.

OBBB Administrative Challenges for HR and Payroll Departments

Guidance on how to implement certain changes introduced by the OBBB is still forthcoming, but there are a few considerations and challenges that may impact you and your company. Getting ahead of them now can help prepare you for the coming tax season:

• Update payroll systems to track qualified overtime premium pay and qualified tip income
• Get ready for new boxes or codes on Form W-2s from the IRS by January 2026
• During 2025, employers must calculate and report qualified overtime premium pay and qualified tip income retroactive to January 1
• Remember: these are federal tax charges and don’t automatically affect state income taxes. Monitor state developments to determine if further steps are needed.

Claiming Income for Personal Returns

Be sure to educate your staff about the changes taking place so they know what’s expected of them. Your employees can claim qualified overtime premium pay and qualified tip income on their personal tax returns, but there is a maximum amount as well as a phase out amount for high earners.

The qualified overtime premium maximum claimed is $12,500 per year for single and $25,000 filing jointly. The deduction phases out with a modified adjusted gross income of $150,000 for single filers and $300,000 for joint filers. The deduction phase out is $100 for each $1,000 over.

The qualified tip income maximum claimed is $25,000 per year. Like the qualified overtime deduction, this benefit phases out with modified adjusted gross income that exceeds $150,000 for single filers and $300,000 for joint filers. The rate of phase out is $100 for each $1,000 over.

Changes to 1099 Forms

A few 1099 Forms will be changed in the following ways:

• Information reporting, Form 1099-K: The OBBB retroactively reverts the Form 1099-K reporting threshold to $20,000 and 200 transactions threshold for 2025.
• Information reporting, Forms 1099-NEC, 1099-MISC: For payments made starting in 2026, the reporting thresholds for Forms 1099-NEC and 1099-MISC are increased from $600 to $2,000 (adjusted for inflation after 2026).

Anders Business Accounting advisors work closely with businesses like yours to ensure a smooth payroll and accounting process that keeps your company on course to meet your goals. To learn more about how our insight into new and emerging legislation such as the OBBB can positively impact your business, and the associated fee, contact an Anders advisor below.