OBBBA impacts on HR and payroll — Key considerations for year-end planning

As year-end quickly approaches, being prepared to ensure you’re in compliance with proper reporting is more important than ever. The One Big Beautiful Bill Act (OBBBA) has material implications on human resources (HR) and payroll. Even though we must wait for additional regulations and guidance to be released, it is essential to take stock now and determine whether your business or organization has the systems and structures in place to support the new requirements.

As introduced in the OBBBA, signed into law on July 4, 2025, there will be major changes to how employers separately report qualified tips and Fair Labor Standards Act (FLSA) required overtime compensation. The requirements in the regulations will likely have a significant impact on how your organization currently calculates, reports and files pertinent overtime wages and tips.

What changed under the OBBBA

According to the IRS, “employees and self-employed individuals may deduct qualified tips received” and the maximum annual deduction for these qualified tips is $25,000 per taxpayer with a phaseout modified adjusted gross income (MAGI) over $150,000. Additionally, the OBBBA introduces no tax on overtime payments. The maximum deduction per taxpayer is $12,500 with a MAGI over $150,000. A potential complication with these tax adjustments is the additional element of a max MAGI of $300,000 for both tips and overtime for any married taxpayers filing joint tax returns. The responsibility of this will most likely fall to the employees affected, as organizations do not have the ability to determine employees’ marital status for tax filings or joint household income.

Obstacles resulting from the OBBBA for employers

With these new changes, you’ll have to adjust to the additional complexities resulting from the OBBBA. While you still must report all tips earned, you are now required to designate which tips qualify for the OBBBA credit. Similarly, you still must pay for all overtime hours worked, but you are now required to designate what overtime wages are eligible or ineligible for the OBBBA credit.

A possible unforeseen consequence of the OBBBA is that your organizations may discover that their HR and payroll systems are not equipped with the proper reporting capabilities to handle these new requirements. You should review your HR and payroll systems to ensure that they’re able to track and report on the new requirements.

Criteria to consider when evaluating your current HR and payroll processes

• Is your current system able to report on the necessary tip, overtime and FLSA data required to complete the correct payment calculations each pay cycle?
• Does your payroll system have the overall capacity to support the additional calculations of each pay cycle?
• Is there any information that is not currently tracked or known that will be required each pay cycle to comply with the new requirements?

With the overall goal to mitigate risk and limit additional manual labor each pay period, use this time before year end to ensure your organization has a system in place to record what wages and tips qualify or don’t qualify for the OBBBA credit and still report all necessary data to comply with IRS and other wage payment regulations.

With limited guidance offered by the IRS in 2025, it is critical to keep documentation on how you are calculating overtime wages and tips, as well as documenting how you determined which wages are eligible for the OBBBA credit and wages which are not. While the IRS has suggested they will be somewhat forgiving in tax year 2025 with how employers track and report these requirements, employers should be prepared to show how they arrived at complying with the regulation. Documenting your approach provides a methodical path for making corrections, if necessary, and helps mitigate the potential risk your organization may be exposed to if the calculations or OBBBA-eligible wages are incorrect.

Opportunities resulting from the OBBBA for employers

Though there are potential obstacles that need to be considered, there are also opportunities presented through the introduction of the OBBBA. The new regulations provide a reason to improve any systems, procedures, and policies surrounding employee overtime and tip reporting. Additionally, the OBBBA has made significant changes to eligibility for health and wellness benefit enhancements for organizations. You should determine if there are additional programs that can enhance the benefits package for current employees and attract potential new employees. The OBBBA specifically expands the eligibility for health savings account (HSA) contributions, expansion of telehealth access, and protection of student loan benefits.

It is more important than ever to have a strong HR and payroll team for your business or organization, whether that is in-house, co-sourced, or outsourced. It is imperative that your organization can execute the necessary systems and reports needed to stay compliant.

Key HR and payroll OBBBA takeaways to consider before year-end

Understand

• Ensure your HR and payroll teams understand the new OBBBA requirements and what should be done to ensure compliance.

Evaluate

• Determine whether your current technology systems are capable of recording and reporting on the additional requirements needed for tips and overtime.
• Determine if there is extra manual work that needs to be done with your current HR and payroll systems on a regular basis that could potentially introduce risk and become increasingly cost-prohibitive.

Plan

• Document as much as possible. The guidance surrounding the OBBBA is still being introduced and will not be finalized before this year-end cycle. It is crucial that your organization can provide an explanation of what is being done to report on the new and existing tips and overtime requirements.

Enhance

• Use this time before year-end to make improvements to processes and procedures that could otherwise create complications in the future.
• Consider hiring a co-sourced or outsourced HR and payroll practitioner to evaluate your current HR and payroll systems, update your current processes, and streamline your updated processes resulting from the OBBBA.