When it comes to payroll processing, there is nothing permanent except change. That’s why it’s so important to stay up to date on all the changes, adjustments, and new payroll policies that come our way.
On July 4th of this year, President Trump’s “One Big Beautiful Bill Act” (OBBBA) introduced major updates to the U.S. tax code. These provisions – effective January 1, 2025, through December 31, 2028 – include impactful changes to payroll taxes, especially for overtime pay, tips, and small business credits.
According to the most recent IRS bulletin dated August 7, 2025, no changes will be made to individual information returns or federal income tax withholding tables for Tax Year 2025. Instead, implementation of key payroll-related provisions will be phased in, with full changes expected in Tax Year 2026.
Important Takeaways
- Form W-2, existing Forms 1099, and Form 941 and other payroll return forms will remain unchanged for TY 2025.
- Federal income tax withholding tables will not be updated for these provisions for TY 2025.
- Employers and payroll providers should continue using current procedures for reporting and withholding.
- The IRS is working on new guidance and updated forms for TY 2026. These will include changes to how tips and overtime pay are reported
- More information will be shared in the coming months about how taxpayers can claim OBBBA-related tax benefits when they file their returns.
Continue reading to learn more.
Federal Income Tax Deduction for Overtime Pay
What’s New:
Individuals may deduct the premium portion of overtime pay (e.g., the “half” in “time-and-a-half”) from federal income tax.
Maximum Annual Deduction:
- $12,500 for individual filers
- $25,000 for joint filers
Deductions Phase Out At:
- $150,000 modified AGI (Single)
- $300,000 modified AGI (Married Filing Jointly)
Eligibility:
- Must be paid under the Fair Labor Standards Act (FLSA).
- Applies to both itemizing and non-itemizing taxpayers.
- Must include Social Security Number on the return.
Federal Income Tax Deduction for Tips
What’s New:
Employees and self-employed individuals may deduct qualified tips from federal income tax. The IRS will publish a list of qualifying occupations by October 2, 2025.
Maximum Annual Deduction:
- $25,000
Deductions Phase Out At:
- $150,000 modified AGI (Single)
- $300,000 modified AGI (Married Filing Jointly)
Eligibility:
Tips must be voluntary cash or charged tips AND received in occupations listed by the IRS as “customarily and regularly” tipped before December 31, 2024.
Excludes:
- Specified Service Trades or Businesses (SSTBs) under Section 199A (e.g., law, health care, consulting).
Navigating the Transition:
The “One Big Beautiful Bill Act” presents plenty of changes, and we all know that transitions can be complicated. To help employers comply with these new regulations, the IRS will provide transition relief for tax year 2025.
Additionally, your Primepoint team is always available to provide information, answer questions, and help you navigate the upcoming transition. For more information on the One Big Beautiful Bill Act and its effects on payroll processing, click here and here.