Effective July 4, 2025, a new federal law in the United States, the One Big Beautiful Bill Act, introduces significant income tax deductions for workers earning tips and overtime pay. While the primary impact falls on employees and independent contractors, employers should take note of the potential implications for compliance, payroll reporting, and talent acquisition.
Key Takeaways for Employers on the One Big Beautiful Bill
Workers can deduct up to $25,000 in tips and $12,500 in overtime pay from their federal adjusted gross income for tax year 2025.
Married couples filing jointly may deduct up to $25,000 in qualified overtime.
Income tax withholding rules remain unchanged for 2025, employers must continue to withhold federal taxes as before.
What’s Changing?
The Act introduces new deductions that allow workers, whether classified as employees or independent contractors, to reduce their taxable income. Specifically, they can deduct up to $25,000 annually in qualified tips and up to $12,500 in qualified overtime (or $25,000 for joint returns). These deductions will apply to the 2025 tax year and will be reflected when individuals file their tax returns in early 2026. Importantly, these benefits do not impact payroll withholdings for 2025, which must continue as usual.
Why It Matters for Global Employers and EOR Clients
While the tax breaks apply to workers, employers and those operating via EOR must adapt to new compliance responsibilities. These include:
Accurately tracking and reporting tip and overtime data;
Preparing for IRS updates to withholding rules starting in 2026; and
Understanding local worker classifications and ensuring proper tax documentation.
Global companies hiring in the U.S. may face additional complexity if they lack local HR infrastructure. This is where EOR services become vital, allowing businesses to outsource tax compliance, payroll reporting, and employee classification requirements to a trusted local partner.
How an Employer of Record (EOR) Supports Compliance in the U.S.
By acting as the legal employer, an EOR helps you manage complex tax, payroll, and reporting obligations with ease. Here's how an EOR like Atlas can support you through the upcoming changes:
Compliance Task | How an EOR Supports You |
|---|---|
Accurate tip/overtime tracking | EOR manages payroll inputs across U.S. employees |
Filing IRS-compliant records | Ensures filings meet federal requirements |
Staying ahead of tax law changes | Monitors legal updates and adjusts processes accordingly |
Reducing internal admin burden | EOR acts as legal employer, centralizing legal compliance and HR tasks |
Supporting international expansion into U.S. | Offers localized HR and payroll expertise in 160+ countries |
If you are hiring or expanding in the U.S., whether you're a startup or a global enterprise, an EOR can simplify operations while ensuring your teams remain compliant with emerging federal legislation.
What Should Employers Do Next
Whether you're managing U.S. employees directly or through an EOR, these critical steps should be taken:
Continue withholding taxes normally through 2025.
Begin tracking tip and overtime earnings for all eligible workers.
Stay alert for IRS guidance on estimating and reporting qualified income.
If using an EOR in the U.S., align on how reporting will be handled for the 2025 tax year.
Plan proactively for anticipated withholding rule changes in 2026.
These provisions are currently set to expire on December 31, 2028, unless extended or revised. With potential IRS guidance and legislative amendments on the horizon, employers should stay alert to ensure continued compliance.