One Big Beautiful Bill Act: Key Takeaways for Employers

The One Big Beautiful Bill Act (OBBBA) was signed into law on July 4, 2025, and came with sweeping changes. You may have heard phrases like “no tax on tips or overtime” and about budget increases for immigration enforcement, but what does it all mean?

Below, we break down key highlights for employers and additional considerations for those operating in California.

What’s New With Overtime and Tips?

The OBBBA establishes deductions for federal income tax for “qualified” overtime compensation and “qualified” tips that apply to the 2025 through 2028 taxable years. The deductions are available for itemizing and non-itemizing taxpayers.

Deduction for Qualified Overtime Pay

Individuals who receive qualified overtime compensation may deduct pay that exceeds their regular rate of pay—such as the “half” portion of “time-and-a-half” compensation—that is required by the Fair Labor Standards Act (FLSA). The maximum annual deduction is $12,500 for individuals (and $25,000 for joint filers). There are additional caps for high-income earners.

We anticipate that the IRS will publish additional guidance in fall 2025 regarding how employers will report the qualified overtime to employees so they can claim the deduction. Some have speculated the IRS will require reporting in “Box 14” (the “Other” category) on Form W-2, or in a supplemental year-end statement. Employers will have to stay tuned for the official IRS guidance.

Employers can refer to the current IRS Guidance here.

California Employers: Only weekly overtime under the FLSA qualifies for the deduction. In California, there are additional overtime requirements—such as daily overtime and overtime for the seventh consecutive day worked in the workweek—these do not qualify for the deduction. California employers will need to work with their payroll systems to find ways to identify only FLSA weekly overtime on Form W-2. This may require special tags or codes for weekly overtime in your system.

Deduction For “Qualified” Tips

Similarly, for years 2025 through 2028, employees and self-employed individuals may deduct qualified tips received in occupations that are listed by the IRS as “customarily and regularly receiving tips on or before December 31, 2024.” By October 2, 2025, the IRS must publish this list of qualifying occupations.

Qualified tips are voluntary cash or charged tips received from customers or through tip sharing. Mandatory service charges added by the business will most likely not be eligible, such as mandatory gratuities for large parties.

For employees, the maximum annual deduction is $25,000. The deduction phases out for taxpayers with higher gross incomes.

Employees are still required to report all tips totaling $20 or more per month to their employer, and employers must include these wages on tax forms as before. However, employers must now separately report the portion of an employee’s pay that is considered “qualified tips” and identify the employee’s tip-earning occupation. 

Payroll Withholdings and Deductions Still Required

• Employers must still collect and withhold federal and California income taxes, Social Security, Medicare, California State Disability Insurance, and California Unemployment Insurance on both overtime and tip income.
• Employees will then be able to make the deduction on their federal income tax return, as applicable. The OBBBA overtime and tip deductions are for federal income tax only.

Immigration and Border Enforcement Budget

According to the American Immigration Council, the OBBBA earmarks about $170 billion for immigration—and border-enforcement related funding provisions. Experts have weighed in that employers should expect an increase in Form I-9 audits, as well as workplace raids.

CEA can assist employers with Form I-9 audits and has additional resources regarding workplace raids.

California Employers: If you receive a Notice of Inspection from an immigration agency, California law requires you to notify your employees. Learn more from the Department of Industrial Relations.

Artificial Intelligence

It is largely up to states to decide whether and to what extent they want to regulate the use of AI and its development.

California Employers: On October 1, 2025, the California Civil Rights Department’s regulation on Automated Decision-Making Systems, including AI, will go into effect. This regulation is aimed at addressing employer uses of AI, including when it may give rise to discrimination. Learn more in CEA’s previous blog.

New Tax Rules on Employer Benefit Offerings

The OBBBA also makes tax-related changes to many employer benefit offerings by permanently extending the federal tax credit for employers who provide paid family and medical leave.  The OBBBA includes an increased contribution for dependent care flexible spending accounts and tax exclusions for employer payments of student loans.

Employers should consult a tax advisor for more information on how to take advantage of new opportunities under OBBBA, as well as comply with the new tax rules.