A High-Level Overview of the New Federal Bill: What Employers Need to Know
As a small business owner, staying informed about new legislative changes is crucial for compliance and effective planning. A recently passed federal bill, sometimes referred to as the "One Big Beautiful Bill Act," has generated significant buzz with phrases like "no tax on tips" and "overtime exceptions." While these headlines sound like significant tax cuts, the reality is more nuanced. This post provides a high-level overview of the bill, clarifying what's in it, what's not, and what employers should be watching for in the coming months.
Key Takeaways at a Glance
Tax Rates are Unchanged: The bill primarily extends existing federal tax rates, preventing them from expiring as scheduled. For most employers, this means the tax tables you've been using will remain in place.
The Changes are for Employees: The most discussed provisions—"no tax on tips" and an overtime exception—do not change your immediate payroll withholding obligations as an employer. The tax benefits will be claimed by employees on their personal tax returns.
Guidance is Pending: The IRS has not yet provided detailed guidance on how to implement these changes. Until they do, you should continue with your current payroll processes.
Federal vs. State Laws: This is federal legislation. Its applicability will depend on whether your state follows federal law or has its own, more beneficial rules for employees.
"No Tax on Tips": What It Means for Employers
One of the most talked-about elements of the bill is the "no tax on tips" provision. Despite the name, this does not mean tips are suddenly tax-free for payroll purposes. As an employer, your process remains the same.
No Change in Payroll Withholding: You must continue to withhold and remit payroll taxes on tips as you do now.
The Employee's Deduction: The tax benefit is a deduction that an eligible employee can claim when they file their personal tax return.
Eligibility is Key: This provision only applies to businesses in industries where tipping is a standard part of compensation, such as restaurants and salons. The IRS is expected to release an official list of eligible occupations in October 2025.
The key takeaway is that while the phrase “no tax on tips” may imply that tips are suddenly tax-free, that is not the case for payroll purposes. Employers will not see any change in their processes for withholding or remitting taxes on tip income, at least not until the IRS finalizes its implementation rules.
Overtime Changes: A Temporary Exception
The bill also includes a temporary exception for overtime pay, but its impact is also at the employee level, not on your payroll calculations.
The Exception is for the "Premium" Portion: The change applies only to the "premium" portion of overtime pay—the extra half-time rate paid above the regular hourly rate. For an employee who earns $20 per hour and works 45 hours, the exception would apply to the $10 per hour "premium" for the 5 overtime hours, not the entire overtime payment.
FLSA Still Applies: The Fair Labor Standards Act (FLSA) defines overtime as hours worked more than 40 in a seven-day period, which must be compensated at a rate of time and a half. This is the overtime definition that will be used to determine the amount subject to the tax credit. Remember that state and local laws can differ, and you must always follow the rule that is most beneficial to the employee. However, as some states and jurisdictions define overtime as hours worked over 8 in one day, not all overtime paid in those states will be eligible for the tax credit.
Employee's Tax Return: Like the tip provision, any tax benefit from this change will be claimed by the employee on their personal tax return, not by a change in your payroll withholding.
Your Best Course of Action: Avoiding Misconceptions
Given the misconceptions surrounding this bill, clear communication is essential. It's important to help your employees understand that these provisions do not mean immediate savings or changes to their paychecks.
For now, the best approach for employers is to:
Continue your current payroll practices.
Monitor official updates from the IRS and your state labor department.
Communicate clearly with employees about what is changing and, more importantly, what is not.
This bill is a heads-up, not an immediate call to action for payroll departments. It's a continuation of existing tax rates with new provisions that shift tax benefits to the employee's personal tax return.
Final Thoughts and Resources
The IRS will be releasing further details, including a list of industries covered by the tip provision and complete guidance on how the overtime exception will be applied. Until then, continue to follow current payroll procedures and consult both federal and state labor laws to ensure compliance.
To help you stay on top of these developments, here are a few resources to consult:
IRS Official Guidance: The IRS will be the primary source for specific implementation rules, including the list of eligible occupations for the tip provision. You can find official updates on the IRS website.
U.S. Department of Labor: For information on the Fair Labor Standards Act (FLSA) and overtime rules, the Department of Labor's website is an excellent resource.
At PayWorks Payroll, we will continue to monitor these developments and break down what they mean for your business. When the time comes to implement any changes, we’ll make sure you have the information and support you need to stay compliant.
PayWorks is not providing legal or tax advice. The information on this website is for informational purposes only and should not be relied upon as legal or tax advice. You should consult with your own legal and tax advisors before making any decisions about your financial situation.