OBBBA: One Big Beautiful Bill (and One Big Beautiful Adventure)

By now you’ve probably heard about the One Big Beautiful Bill Act—or OBBBA. Before we get into what employers need to do, let’s talk a bit about what this thing actually is.

What Is OBBBA?

OBBBA is new federal legislation designed to let employees deduct certain overtime premiums and tips from their federal taxable income. The idea is simple: workers who put in extra effort should keep more of the money they earn.

Whether the execution is simple… well, that’s still up for debate. The IRS is still releasing guidance, the states are doing their own thing, and everyone else is just trying to keep up.

What Is Premium OT?

“Premium OT” is the magic phrase of this whole law, and it has a very specific definition:

Premium OT = only the overtime that exceeds 40 hours in a single workweek.

To be eligible for the federal deduction, the overtime must meet FLSA rules—not state rules, not contractual rules, and not “the boss was in a good mood today” rules.

What DOES qualify?

• The overtime premium portion (the extra 0.5× above the regular rate)

• Only for hours over 40 in a workweek

What does NOT qualify?

• Daily overtime (like California OT after 8 hours in a day)

• Double time

• Union/CBA overtime rules

• Any state-specific or employer-specific premium pay

If it isn’t federally required weekly overtime, it isn’t OBBBA-deductible. Period.

State Differences Matter

Here’s where things get spicy:OBBBA applies to federal taxes, but each state decides whether to follow the federal changes or ignore them.

States fall into three main buckets:

1. States that have already said “No thanks”: CA, CO, RI

These states have formally decoupled from OBBBA, meaning:

• Tips and overtime remain fully taxable at the state level

• No additional state deduction

• No changes for 2025 (or likely 2026)

California is in this group—so for 2025 and 2026, employees still pay CA state income tax on tips and all forms of OT, including federal “premium OT.”

2. States still thinking about it: MA, NC, PA

These states are:

• Reviewing the federal changes

• Proposing their own bills

• Considering partially adopting tips but not overtime

• Not making anything final yet

For now, tips and overtime remain taxable in these states until they formally adopt something new.

3. States that typically follow federal law automatically: OR and other rolling-conformity states

These states generally adopt new federal tax rules unless they pass a law to opt out.

So unless their legislatures act:

• Premium OT and qualifying tips will reduce both federal and state taxable income

• Employees in these states may see bigger combined tax savings

This is one of the most important nuances of the OBBBA rollout:Your federal OBBBA benefit may not match your state tax treatment.

Okay, Now Let’s Talk About the Fun Part: Implementation

If you're feeling déjà vu, you're not alone. We’re having flashbacks to the Healthy Workplaces, Healthy Families Act of 2014—a well-intentioned law that arrived with beautifully vague instructions. Back then, we stayed compliant by being nimble, informed, and slightly over-caffeinated.

We’ll be approaching OBBBA the same way.

We’ve read the tea leaves, the webinars, the IRS updates, the legal advisories, and the “expert” blogs. Our goal as always:

Stay ahead of the guidance so you don’t have to.

What Employers Need to Do (According to the Latest Guidance)

Industry experts agree that 2025 is a reporting year—not a full compliance year.

2025: Prep, Track, Inform

• We’ve already built reporting tools to calculate premium OT

• We’ll track qualifying overtime internally

• At year-end, we’ll reach out to each employee individually with their total qualified premium OT so they can use it on their tax return

• The IRS isn’t requiring W-2 updates yet, so this is very much a

  “share the info; employees handle their own taxes” year

2026: Full Compliance Mode

Starting in 2026, we move from “helpful guide” to “official data source”:

• Track premium OT in real time

• Report it directly in the employee portal

• Use the updated W-2 fields when they’re released

• Follow all finalized IRS reporting requirements

Think of 2025 as the dress rehearsal and 2026 as opening night.

Our Commitment to You

We know laws like these can create confusion, stress, and the sudden desire to run away and start a goat farm.

But we navigated the confusing mandates of 2014, and we’ll navigate this too—keeping you informed, compliant, and as headache-free as possible.

We’ll continue to share information as we receive it, hunt it down, interpret it, decode it, and occasionally debate it over coffee.