Essential Guidance for Navigating the New U.S. Tax Bill
If you’re an HR, payroll, or operations leader, you already know how tricky it is to keep up with changing regulations. The new tax bill passed recently, “One Big Beautiful Bill Act” (H.R.1), is no exception. It brings some significant changes to tax deductions for overtime and tips that you’ll need to address right away. These shifts will impact how you handle payroll, stay compliant, and manage your team. This blog explores what’s coming and how you can prepare.
How Does the New Tax Bill Affect Me and My Organization?
Signed into law on July 4, 2025, the new tax bill includes federal income tax deductions for both qualified overtime and qualified tips, effective for tax years 2025 through 2028. This legislation represents a significant shift in how overtime compensation and tipped wages are treated for tax purposes, creating both opportunities and administrative challenges for employers.
This bill follows through on campaign promises to cut taxes for working Americans, especially those in service jobs and hourly workers. The changes take effect immediately for pay received starting January 1, 2025. For 2025 only, there’s a flexible transition rule that lets the Secretary of the Treasury decide on reasonable methods for tracking qualified tip and overtime amounts.
“The U.S. Department of Treasury will develop regulations and issue new guidance to prevent the abuse and reclassification of overtime premiums and tips. The first of this guidance is expected in October 2025.”
UKG Senior Product Management Business Analyst
Overtime Overhaul: What’s Changing and Why It Matters
The new legislation doesn’t change who qualifies for overtime under the Fair Labor Standards Act (FLSA). Instead, it creates a federal tax deduction for overtime pay, capped at $12,500 for single filers and $25,000 for married couples filing jointly. The benefit phases out for single filers making $150,000 or more ($300,000 for joint filers) and is unavailable to those making more than $275,000, or $550,000 for couples.
This means employees who previously might have been reluctant to work overtime due to higher tax brackets may now be more willing to take on additional hours. The financial incentive could help address staffing shortages, particularly in manufacturing, retail, and hospitality sectors where overtime is common.
However, this also creates compliance challenges. Payroll leaders will need to ensure their systems can accurately track and report qualified overtime separately from regular overtime payments. And Operations managers will need to balance the potential for increased overtime demand with scheduling efficiency and budget constraints. The IRS will require specific documentation, and failure to properly categorize these payments could result in penalties.
Tipped Wage Reform: Shifting Rules for Service Industries
The tipped wage rules work the same way as the overtime deductions. The new tax bill creates a deduction for qualified tip income, with the same caps and phase-out thresholds as overtime: $12,500 for single filers and $25,000 for married couples filing jointly, phasing out at higher income levels.
The key compliance requirement is that tips must be reported to the employer and included on the worker’s W-2 tax form, so payroll teams need to ensure tip reporting systems are robust and accurate. Operations leaders in food service and hospitality will need to work closely with payroll to implement technology solutions that seamlessly integrate tip reporting with existing systems. Digital payment processing solutions that automatically track tips will become increasingly valuable as the IRS will likely increase scrutiny on tip reporting accuracy.
“Employers must remind employees of their obligation to report all tips received. They can revisit their internal policies and training on tip reporting and provide employees with any relevant updates.”
UKG Senior Product Management Business Analyst
Healthcare Spotlight: Workforce Pressure and Regulatory Changes
While the current legislation focuses primarily on tax treatment of overtime and tips, the healthcare sector faces unique challenges in implementation. Healthcare workers often work extensive overtime hours, and the new tax benefits could provide meaningful relief for nursing staff, technicians, and other clinical workers who are essential to operations.
However, healthcare employers must balance these benefits with existing staffing mandates and quality of care requirements. Operations leaders will need to carefully monitor employee fatigue and compliance with patient safety regulations, while payroll teams will need to ensure accurate tracking of complex healthcare worker schedules that often include multiple pay rates and shift differentials.
“Like other industry sectors, healthcare leaders are faced with an ever-changing and increasingly complex environment to navigate,” says Nanne Finnis, UKG Chief Nurse Executive. "The speed and intensity of clinical care requirements, innovation, and technology, coupled with a changing workforce, demand that leaders balance workforce desires with business needs. For example, we know that extensive overtime may lead to fatigue, stress, and burnout and increased costly turnover.”
Healthcare leaders need quick, actionable access to predictive data and a unified view of their organization. HR technology solutions can surface early indicators of compliance issues, highlight outliers, and even flag excessive overtime. Automated technology that compiles and delivers this information across all leadership levels is no longer optional. Today, it’s essential.
Small Business Considerations: Unique Challenges and Opportunities
Growing businesses can leverage the new tax benefits as recruitment tools in competitive labor markets. Small restaurants, retail stores, and service businesses can now help employees keep more of their overtime and tip income, potentially competing with larger employers for quality workers. However, small businesses relying on basic timekeeping methods or outsourced payroll services may need upgrades to properly track and report qualified overtime and tip income separately.
The compliance burden could be challenging for small business owners who are juggling HR and payroll tasks without dedicated staff. This is a good opportunity to evaluate whether your current payroll solution can meet your growing needs. Your payroll vendor should be able to ensure compliance while maximizing your company’s competitive advantage.
Strategic Implications for Business Leaders
The financial impact of the new bill will affect more than just taxes. Finance and Operations teams will need to work together on budget planning because some labor costs will be taxed differently. Operations managers especially will need to plan for how increased overtime will impact both total compensation costs and productivity.
From a talent management perspective, the changes could improve employee retention and satisfaction. Workers keeping more of their overtime and tip income may be more engaged and willing to take on additional responsibilities. However, HR and Operations teams will need to communicate these benefits clearly to ensure employees understand the value.
All these changes make upgrading your payroll technology essential for compliance. Your payroll system must be capable of detailed reporting and tracking to meet the new requirements. Organizations that quickly implement more powerful tracking and reporting systems will be better positioned to attract and retain talent who want these new benefits.
Preparing for Implementation
The immediate action items span multiple leadership roles:
- Payroll leaders must audit current timekeeping systems to ensure they can properly segregate and report qualified overtime and tip income
- Operations managers need to assess how increased overtime demand might affect scheduling, productivity, and customer service levels
- HR teams should focus on training and establishing clear procedures for ongoing compliance
Cross-functional collaboration is critical. Work with your organization’s legal and accounting teams to understand how these changes interact with state and local regulations.
Finally, all leadership teams should coordinate to communicate with the workforce about these changes. Employees need to understand how the new provisions affect their take-home pay and what documentation they might need for tax filing purposes.
In Summary: New U.S. Tax Bill Challenges and Opportunities
The new tax bill represents a major shift in how overtime and tip income are treated for tax purposes. While the changes create administrative challenges, they also provide opportunities for improving employee satisfaction and potentially addressing workforce shortage issues.
Success in this new environment requires proactive planning, reliable technology platforms, and clear communication across teams. Organizations that approach these changes strategically will find opportunities to strengthen their competitive position while ensuring full compliance with the new requirements.
Rather than viewing these changes as regulatory burdens, leaders should consider how they can support broader goals such as employee retention, operational efficiency, and brand reputation. With thoughtful planning and cross-functional alignment, your organization can transform these new requirements into a source of competitive strength that benefits both your business and your people.
Learn how UKG HCM solutions can help you manage these changes and more to ensure your organization is not only in compliance but also ready to take on any new challenges on the way.
Note: This information is current as of the publish date. Workforce leaders should consult with their legal and tax advisors for organization-specific guidance and monitor official government sources for the most up-to-date implementation details. Laws and regulations may change, and this blog post should not be considered legal or tax advice.
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