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One Big Beautiful Bill Act for Payrollers

Behind the Scenes and Across the Table


The One Big Beautiful Bill Act (OBBBA) has dominated headlines with its “No Tax on Overtime” and “No Tax on Tips” promises. Employees are buzzing, managers are curious, and executives want answers.

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But here’s the truth: while employees may see a line or two change on their pay stubs, payroll teams are where the heavy lifting really happens.


What Changes in Payroll Processing


The headlines made OBBBA sound easy: “No Tax on Overtime.” “No Tax on Tips.” But for payroll professionals, this isn’t just a new law — it’s a complete workflow adjustment.


Here’s where the rubber meets the road.


Under OBBBA, not all overtime is created equal. Payroll must split it out to track exemptions correctly.
Under OBBBA, not all overtime is created equal. Payroll must split it out to track exemptions correctly.

1. Separating Pay Components

For years, most payroll systems bundled base wages and overtime premiums into a single “overtime pay” line. That worked because it was all taxable. But under OBBBA, the overtime premium portion and tips may be federally exempt.


To stay compliant, we now have to split these components:

  • Base Pay = taxable

  • Overtime Base = taxable

  • Overtime Premium = exempt

  • Tips = potentially exempt


Example:

Pre-OBBBA, an employee earning $20/hr with 45 hours worked might see:

  • Regular Pay = $900

  • Overtime Pay = $150


Total = $1,050, fully taxable.


Post-OBBBA, that same check needs to look like this:

  • Base Pay = $800 (taxable)

  • Overtime Base = $100 (taxable)

  • Overtime Premium = $50 (exempt)


Total = $950 taxable + $50 exempt



System updates aren’t optional — OBBBA requires new codes, flags, and reporting logic.
System updates aren’t optional — OBBBA requires new codes, flags, and reporting logic.

2. System Updates & Reporting

This isn’t just a “flip a switch” situation. Most payroll systems weren’t built with OBBBA in mind. Vendors are rolling out patches, but configuration changes are on us.

That means:

  • New earnings codes for overtime premium and tips

  • Updated taxability flags in your system

  • Revised reporting logic for YTD totals

  • Year-end reporting (W-2s) that will likely require additional boxes or codes — pending IRS guidance


Employees see the net pay. Payroll sees the calculations that get them there.
Employees see the net pay. Payroll sees the calculations that get them there.

3. Tax Withholding Calculations

Here’s where things get messy. Overtime premiums and tips might be exempt, but everything else still flows through federal (and most state) tax withholding.

This creates two major challenges:

  1. Employee Expectations – Workers may think all overtime and tips are tax-free. When their net pay doesn’t match that fantasy, guess who they’ll ask? (Yep, payroll.)

  2. System Precision – Payroll systems must calculate taxable vs. exempt wages perfectly, or withholding errors will follow.




Audit controls aren’t optional. OBBBA requires proof that exemptions were applied correctly.
Audit controls aren’t optional. OBBBA requires proof that exemptions were applied correctly.

4. Audit & Reconciliation

Every exemption creates an audit trail. OBBBA is no different.


Payroll must reconcile:

  • YTD totals of exempt vs. taxable pay

  • Employer contributions to Social Security & Medicare (still required on base pay, not on exempt portions)

  • Accuracy across multiple states — some of which may not align with OBBBA at all






How Payroll Translates OBBBA


Here’s the truth: employees don’t care about earnings codes or W-2 Box 12 reporting. They just want to know why their paycheck looks different. That makes payroll the translator — connecting compliance to real-world impact.


  • For Employees

    • Explain clearly that only part of overtime and tips are exempt, not the whole thing.

    • Remind them net pay will increase, but maybe not as much as they expect.

    • Flag that state laws may differ — payroll doesn’t control state tax codes.

  • For HR & Managers

    • Arm them with FAQs and talking points. When employees ask questions, HR shouldn’t be improvising answers.

    • Highlight the increased call volume payroll will see during rollout, so managers can plan support.

  • For Executives

    • Frame OBBBA as both a compliance issue and a morale issue. If payroll gets it wrong, it’s costly — not just in penalties, but in employee trust.

    • Stress the importance of giving payroll teams time, tools, and resources to adapt.

Payroll doesn’t just process pay — we translate policy into dollars people can trust.
Payroll doesn’t just process pay — we translate policy into dollars people can trust.

Bottom Line for Payrollers

The OBBBA isn’t just about reducing taxes on overtime and tips. It’s about retooling payroll processes, rethinking reporting, and rebuilding communication channels.


  • Precision in coding and calculations

  • Vigilance in auditing and reconciliation

  • Clear communication across employees, HR, and leadership


Because while the headlines promise “no tax on overtime,” the real story is this: payroll makes it possible.


We’re the ones making sure the law turns into real-world paychecks that are accurate, compliant, and understood.


And honestly? That’s what payroll does best.

 
 
 

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