INSIGHT

The payroll revolution is here: How the OBBBA transforms HR strategy 

July 24, 2025

Services: HR Compliance, HR Systems, Payroll Services, Compensation Consulting, HR Consulting, HR Strategy

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The One Big Beautiful Bill Act, signed into law on July 4, 2025, has fundamentally changed the landscape for human resources professionals and their organizations. If you’re an HR leader, this legislation presents both unprecedented opportunities and complex challenges that demand immediate attention. The Act’s provisions around eliminating federal income taxes on qualified tips and overtime compensation through 2028 represent more than just tax policy—they’re reshaping how you think about compensation, recruitment, and retention strategies. 

The implications extend far beyond simple tax savings. Both the overtime and tips provisions are retroactive to January 1, 2025, meaning your employees will receive refunds for qualified wages already earned this year. This creates an immediate opportunity to demonstrate value to your workforce while positioning your organization as forward-thinking in your approach to employee benefits. 

The transformation of service industries: Tips without the tax burden 

Industries reliant on tips—including waitresses and waiters, rideshare and food delivery drivers, taxi drivers, beauticians, and hairdressers—now have a compelling new recruitment tool at their disposal. The Act allows individuals to deduct up to $25,000 in qualified tips annually, with the average tipped worker saving approximately $1,300 per year. 

For organizations in these sectors, this represents a fundamental shift in how you can approach compensation conversations. You’re no longer just offering a base wage plus tips—you’re offering a tax-advantaged income stream that significantly enhances take-home pay without increasing your labor costs. 

Strategic considerations for tip-heavy industries 

The immediate question becomes: how do you leverage this advantage in your hiring and retention efforts? Consider these approaches: 

• Recruitment messaging: Highlight the tax advantages in job postings and interviews, positioning your organization as offering premium earning potential 
• Retention conversations: Use the retroactive benefits as a demonstration of your commitment to employee financial wellbeing 
• Competitive positioning: Emphasize how your tipped positions now offer significantly better net compensation than non-tipped alternatives 

Treasury will publish a list of occupations that customarily and regularly receive tips within 90 days of the Act’s signing, providing clarity on which roles qualify for these benefits. 

Healthcare and essential services: The overtime opportunity 

The overtime provisions create equally compelling opportunities, particularly for industries that rely heavily on overtime work. About 4.8 million veterans work in overtime-eligible jobs, with approximately 1.4 million regularly working overtime hours. Employees can now deduct up to $12,500 annually ($25,000 for married filing jointly) of their overtime premium pay. 

This has profound implications for healthcare organizations, emergency services, and other essential industries where overtime is both common and necessary. The average hourly worker eligible for overtime benefits will save approximately $1,400 annually. 

Rethinking overtime strategy 

With the reduced tax burden of working overtime hours, many more workers may be willing to take additional shifts. This creates new opportunities for addressing staffing challenges while providing employees with more attractive earning potential. 

Consider these strategic shifts: 

• Shift scheduling: Evaluate whether offering more overtime opportunities could improve both staffing coverage and employee satisfaction 
• Recruitment for overtime-eligible positions: Position these roles as offering enhanced earning potential through tax-advantaged overtime 
• Cross-training programs: Develop employees’ skills to take advantage of overtime opportunities across departments 

The administrative complexity: What your payroll team needs to know 

While the benefits are clear, the administrative requirements are substantial. Employers will need to adjust payroll systems to accurately track and separately report qualified tips and overtime amounts on W-2 forms. Currently, overtime pay is not recorded separately from regular wages on Form W-2, creating an immediate systems integration challenge. 

Key implementation requirements 

Your payroll operations will need to address several critical changes: 

• Separate tracking systems: Implement processes to distinguish between regular wages and qualified overtime/tip income 
• W-2 reporting modifications: Update forms to separately report these amounts for employee tax filing 
• System integration: Work with payroll providers to accommodate new reporting requirements 

For 2025, the Act includes a transition rule allowing employers to use “any reasonable method” specified by the Treasury Secretary to estimate qualified overtime and tips. The Treasury Department will issue guidance on acceptable estimation methods for the retroactive period. 

Classification reviews: The exempt employee dilemma 

One of the most significant strategic challenges involves employee classification. Certain occupations are ineligible for the overtime deduction, specifically those working in Specified Service Trade or Business (SSTB) under Section 199A, including accounting, healthcare, law, consulting, financial services, and others. 

For eligible employees, the tax advantages create a compelling case for reclassification. Exempt employees may request to become non-exempt to access tax-free overtime benefits. This requires careful analysis of: 

• Fair Labor Standards Act compliance: Evaluation of job duties and responsibilities 

• Operational impact: How reclassification affects workflow and management structure 

• Cost-benefit analysis: Weighing increased administrative complexity against employee satisfaction and retention benefits 

Compensation strategy redesign: A win-win approach 

The Act opens possibilities for innovative compensation structures. One strategic approach involves reducing regular hourly rates while encouraging more overtime work that qualifies for tax advantages. This can benefit both employers and employees when implemented thoughtfully. 

Developing new compensation models 

Consider these approaches for maximizing the Act’s benefits: 

• Flexible scheduling: Offer compressed work weeks that naturally create overtime opportunities 
• Project-based overtime: Structure special projects or seasonal work to take advantage of tax-free overtime 
• Cross-departmental opportunities: Create systems for employees to pick up overtime shifts across departments 

Important limitations and considerations 

While the opportunities are significant, understanding the limitations is crucial for proper implementation: 

• Federal income tax only: The deductions apply only to federal income taxes. Employees and employers remain responsible for Medicare and Social Security taxes 
• Income phase-outs: Both deductions phase out when modified adjusted gross income exceeds $150,000 ($300,000 for married filing jointly) 
• FLSA requirements: Only overtime required by the Fair Labor Standards Act qualifies, not voluntary overtime or overtime required by state laws or collective bargaining agreements 
• Premium pay only: Only the premium portion of overtime (the “half” in “time-and-a-half”) qualifies for the deduction 

Taking action: Your next steps 

Organizations that move quickly to understand and implement these changes will gain significant competitive advantages in recruitment and retention. 

Here’s what you should prioritize immediately: 

1. Payroll system assessment: Evaluate your current systems’ ability to track and report qualified tips and overtime separately 

2. Employee classification review: Analyze which positions might benefit from reclassification and the associated implications 
3. Communication strategy: Develop messaging to help current and prospective employees understand these new benefits 

4. Policy updates: Revise employee handbooks and compensation policies to reflect new opportunities and requirements 

The complexity of these changes underscores the importance of working with experienced professionals who understand both the technical requirements and strategic opportunities these provisions create. 

Partner with BPM for strategic implementation 

The new provisions around tips and overtime represent both tremendous opportunity and significant complexity. At BPM, our team of tax, advisory, and HR professionals can help you navigate these changes strategically, from payroll system implementation to compensation strategy redesign. 

Whether you’re looking to maximize recruitment advantages, redesign compensation structures, or address the administrative challenges of compliance, we’re here to help you turn this legislation into a competitive advantage. 

Ready to discuss how the One Big Beautiful Bill Act can benefit your organization? Contact BPM today to schedule a consultation with our HR advisory team. Together, we can develop a comprehensive strategy that positions your organization for success in this new era.