Navigating the One Big Beautiful Bill with BambooHR Payroll
Summary:
The One Big Beautiful Bill introduces temporary federal income tax deductions for qualified tips and overtime pay earned between January 1, 2025, and December 31, 2028. These deductions do not affect state or local taxes. This guide explains eligibility, deduction limits, reporting requirements, and how BambooHR Payroll will support these changes.
Who This is For
This information applies to:
- Employees who regularly receive tips or work overtime.
- Payroll administrators and HR managers who use BambooHR Payroll.
- Accountants and finance teams tracking federal reporting compliance.
Before You Start
Before applying these changes, confirm that:
- You are processing federal payroll (these deductions do not apply to state or local taxes).
- You have a valid Social Security Number (SSN) for each employee (and spouse, if applicable).
- Your payroll is subject to FICA taxes; these still apply to tips and overtime.
- You are using the most current BambooHR Payroll tax configuration (updates will be released once IRS guidance is finalized).
1. Review Deduction Limits
- Tips: You can deduct up to $25,000 in qualified tips from taxable income.
- Overtime: You may deduct up to $12,500 in qualified overtime pay.
- Both deductions phase out by $100 for every $1,000 over the income threshold ($150,000 individual / $300,000 joint).
2. Identify Eligible Employees
- Tip deduction eligibility: Employee must customarily receive tips in their profession as of December 31, 2024.
- Overtime deduction eligibility: Applies only to overtime pay required under FLSA (40+ hours/week).
- Excludes state-specific daily overtime or collective bargaining overtime.
3. Track Qualified Income
- Qualified Tips: Must be voluntary and not part of mandatory service charges.
- Qualified Overtime: Only includes the premium portion (the additional 0.5x rate).
- Example: If an employee earns $20/hour and works 10 overtime hours, only $100 (0.5 × $20 × 10) is deductible, not the full $300.
4. Prepare for Reporting
- For 2025, employers may estimate qualified amounts using a reasonable method.
- For 2026, the IRS will release updated Form W-2 codes:
- Box 12 (TP) Qualified tips
- Box 12 (TT) Qualified overtime compensation
- Box 14b Treasury tipped occupation code
5. Communicate to Employees
Inform employees that:
- These deductions apply only to federal taxes.
- Their paystubs will not show the deduction amount (it applies at tax filing).
- Differences may appear between pay statements and W-2 forms due to the partial nature of the overtime deduction.
| Role | What You Need to Do |
|---|---|
| Employee | Track your reported tips and confirm overtime hours accurately reflect premium pay. Consult a tax professional before filing. |
| Manager | Verify time entry and ensure employees correctly record tips. |
| Payroll Admin | Configure BambooHR Payroll to categorize “Qualified Tips” and “Qualified Overtime.” Review W-2 output once IRS forms update. |
| Symptom | Cause | Fix |
|---|---|---|
| Paystub totals do not match W-2 | W-2 reports only premium portion of overtime | Review overtime rules under FLSA and confirm calculations |
| Deduction missing in employee tax data | Employee not in an eligible tipped occupation. | Verify against IRS list once published. |
| Unable to claim deduction | Missing or invalid SSN. | Ensiure correct SSN on file for all employees. |
| BambooHR Payroll not reflecting deductions | IRS configuration update not yet released. | Wait for BambooHR Payroll patch post-IRS guidance. |
If deductions do not appear as expected or W-2 formatting differs from IRS guidelines:
- Contact BambooHR Payroll Support or chat with us by clicking the "?" icon in your account, then choose Chat with Us.
- If you manage 941-eligible accounts, contact BambooHR Payroll Support.