One Big Beautiful Bill Act: What Hawaii Employers Need to Know

You've probably heard "no tax on tips" and "no tax on overtime" in the news. Those are real provisions, but as an employer, what they actually mean for your payroll is different from what the headlines suggest. This guide explains exactly what changed, what you need to do, and what you can safely ignore.

What Is the OBBBA?

The One Big Beautiful Bill Act (H.R. 1, P.L. 119-21) was signed into law on July 4, 2025. It made more than 100 changes to the federal tax code. Several provisions are retroactive to January 1, 2025, so some of this already applied to your 2025 payroll even if you didn't know it.

For employers, the most immediate changes involve tips, overtime pay, W-2 reporting, and certain employee benefits. We cover the benefits changes separately in our OBBBA employee benefits guide. This article focuses on payroll.

No Tax on Tips: What It Actually Means

The short version: Eligible employees can deduct up to $25,000 in tip income from their federal taxes. As the employer, you don't do anything differently, except track tips separately and report them on the W-2 in a new way.

Here are the details:

• Who gets the deduction: The employee, on their personal tax return (not you)
• Maximum deduction: $25,000 per year per employee
• Income phase-out: Starts phasing out when an employee's modified adjusted gross income (MAGI) exceeds $150,000 (single) or $300,000 (married filing jointly). Most tipped workers won't be affected by this
• Which occupations qualify: Jobs that "customarily and regularly" received tips on or before December 31, 2024. The IRS and Treasury have proposed regulations listing nearly 70 qualifying occupations: servers, bartenders, hotel staff, valets, and similar roles are on the list
• What counts as a "tip": Cash tips and credit card tips. Tips received through tip-sharing arrangements. Tips must be voluntary, left by the customer without consequence for nonpayment
• Mandatory service charges: Do not qualify. If you add an automatic 18% gratuity to large-party bills, that's not a tip under the law. It's a service charge. However, any additional voluntary tip a customer leaves on top of a service charge can still qualify
• FICA taxes unchanged: Tips are still subject to Social Security and Medicare taxes for both you and the employee. "No tax on tips" refers to federal income tax only
• Effective years: 2025 through 2028

No Tax on Overtime: What It Actually Means

The short version: Eligible employees can deduct the overtime premium (not all overtime pay, just the extra "half" portion) from their federal taxes. Again, this is the employee's deduction, not something you change in your payroll calculations.

Per IRS Publication 926 (2026):

“Qualified overtime is compensation that exceeds the regular rate of pay (such as the ‘half’ portion of time-and-a-half compensation) that is required to be paid to an individual under section 7 of the Fair Labor Standards Act (FLSA) of 1938.” IRS Publication 926 (2026), What's New section

Key details:

• Maximum deduction: $12,500 per year per individual filer; $25,000 for married filing jointly
• What "qualified overtime" is: Only the premium "half" portion of time-and-a-half. Example: employee earns $16/hr regular. Overtime rate is $24/hr. Only the $8 premium per hour qualifies, not the full $24
• FLSA overtime only: Must be overtime required under federal law (hours over 40 in a workweek). Overtime paid voluntarily, under a union contract, or required only by state law does not qualify
• Hawaii note: Hawaii uses standard FLSA weekly overtime rules (over 40 hours/week), so most overtime you pay will qualify
• Income phase-out: Same as tips. Phases out above $150,000 MAGI (single) or $300,000 (joint)
• FICA unchanged: Overtime pay is still subject to Social Security and Medicare taxes
• Effective years: 2025 through 2028

Do You Need to Change Withholding?

No, not automatically. This is the most misunderstood part of the OBBBA.

The one exception: if an employee submits an updated Form W-4, you must adjust their withholding accordingly. Employees who want to capture the benefit throughout the year (smaller paycheck deductions now, rather than a refund at tax time) can do this by submitting a new W-4. You are required to process it, but you don't prompt it or initiate it yourself.

Helping Employees Update Their W-4

This is actually something you should proactively help with. The IRS has specifically encouraged employers to do so.

Here's how it works: employees use Form W-4 Worksheet 4(b) to calculate their expected deduction (tip income or overtime premium), then enter that figure on line 4(b) of the W-4 itself. When you process the updated W-4, their withholding drops to account for the expected deduction.

The catch for 2025: because the law passed mid-year, employees may not know their full 2025 tip or overtime totals yet. Per IRS Notice 2025-62, employers are strongly encouraged to proactively provide employees with an approximate accounting of their 2025 qualified tip and overtime amounts. This helps employees fill out Worksheet 4(b) accurately and either adjust 2025 withholding or prepare for their 2025 tax return.

W-2 Reporting: What Changes for You

This is the part that requires action on your end. Starting with 2026 Forms W-2, employers must separately report cash tips (box 12, code TP), qualified overtime compensation (box 12, code TT), and the employee's tipped occupation code (box 14b). For 2025 Forms W-2 the IRS granted transition relief (see below). These amounts are still included in box 1 wages; the new codes report them separately.

The 2026 General Instructions for Forms W-2 and W-3 add these new codes. What you need to do:

• Track tips and overtime premium pay separately in your payroll system throughout the year, not as a year-end cleanup
• Use separate pay codes for regular wages, qualified tips, and FLSA overtime premium pay
• Confirm your payroll software or provider is updated for the new W-2 format. Ask them directly if you're not sure

On the 2025 penalty relief: IRS Notice 2025-62 treats tax year 2025 as a transition period. The IRS will not impose penalties on an otherwise correct 2025 Form W-2 just because it does not separately show tips, the tipped occupation, or qualified overtime. That relief does not extend to 2026. Make sure your setup is correct for 2026 W-2s (due to employees and the SSA by February 1, 2027) before year-end.

The Two IRS Notices You Should Know

Two IRS notices govern the details for 2025 and 2026:

• IRS Notice 2025-62 (2025-48 I.R.B. 740): Provides transition relief for 2025 W-2 reporting. Also describes the Occupation Code system being developed to define qualifying tip occupations. Available at IRS.gov.
• IRS Notice 2025-69: Guidance for individual taxpayers calculating their qualified tip and overtime deduction amounts for 2025. Your employees' tax preparers will need this. Available at IRS.gov.

You don't need to read these yourself. Your payroll provider and CPA should be familiar with both.

Hawaii-Specific Considerations

Does Hawaii Conform to the Federal Deductions?

Hawaii does not automatically adopt federal tax law changes. As of this writing, the Hawaii Department of Taxation has not confirmed whether Hawaii will adopt the OBBBA tip and overtime deductions for state income tax purposes.

What this could mean: your employees may owe Hawaii state income tax on tips and overtime even if those amounts are federally deductible. Watch for guidance at tax.hawaii.gov and consult a Hawaii CPA for your specific situation.

For Hospitality and Restaurant Employers

Hawaii's tourism industry makes tip tracking especially important here. If you operate a restaurant, hotel, resort, spa, or any business where employees receive tips, separate tip coding in your payroll system is now a W-2 compliance requirement, not optional. Make sure you're also paying at least the Hawaii minimum wage of $16/hour.

For Employers with Hourly OT Workers

Retail, healthcare, construction, and warehousing businesses with non-exempt hourly employees need the overtime premium tracked separately from base pay. Your payroll system needs to isolate the "half" portion specifically, not just total OT hours or total OT pay. For background on Hawaii OT rules, see our Hawaii overtime laws guide.

What to Do Right Now

• ☐ Ask your Hawaii payroll service: "Can you separately track and report qualified tips and FLSA overtime premium pay for 2026 W-2s?" If they can't give you a clear yes, escalate
• ☐ Set up separate pay codes for qualified tips and FLSA overtime premium if you haven't already
• ☐ Do not change withholding on your own. Only adjust if an employee submits an updated Form W-4
• ☐ Provide employees with 2025 tip and OT summaries so they can update their W-4 or prepare for filing (per IRS Notice 2025-62 guidance)
• ☐ Set up the 2026 W-2 codes: box 12 code TP (tips), code TT (qualified overtime), and box 14b (tipped occupation code)
• ☐ Monitor tax.hawaii.gov for Hawaii state conformity guidance (see our Hawaii payroll taxes guide for state-specific requirements)
• ☐ Review IRS Notices 2025-62 and 2025-69 with your CPA for any 2025 year-end implications
• ☐ See our separate guide on OBBBA employee benefits changes for DCAP, student loans, and HSA updates

Frequently Asked Questions

What is the 'no tax on tips' provision in the One Big Beautiful Bill Act?

The OBBBA's 'no tax on tips' provision lets eligible employees in occupations that customarily received tips deduct up to $25,000 a year of qualified tips on their federal income tax return (2025 through 2028, phased out at higher incomes). Tips are still wages for Social Security and Medicare (FICA), and employer withholding does not change unless an employee files a new Form W-4. Hawaii employers in hospitality and food service still collect and remit FICA on reported tips.

Does the OBBBA's overtime tax exclusion affect employer payroll obligations?

The OBBBA lets eligible employees deduct the premium portion of FLSA-required overtime (up to $12,500 a year, $25,000 on a joint return) on their federal income tax return. Overtime pay remains subject to FICA (Social Security and Medicare) taxes. Hawaii employers still owe the employer share of FICA on all overtime wages. The exclusion is an employee-side income tax benefit and does not reduce the employer's payroll tax obligations.

Should Hawaii employers ask employees to update their W-4 because of the OBBBA?

The IRS has indicated employees may want to submit a new W-4 to adjust withholding if they expect to benefit from the tip or overtime exclusions. Employers should notify affected employees of the option to update their W-4 but cannot require it. Until an updated W-4 is received, employers should continue withholding based on the current W-4 on file.

How does the OBBBA affect W-2 reporting for Hawaii employers?

For tax year 2025, IRS Notice 2025-62 treats the year as a transition period: the 2025 Form W-2 was not changed, and employers will not be penalized for not separately reporting tips or qualified overtime, though the IRS encourages giving employees those totals (for example in box 14). Starting with 2026 Forms W-2, cash tips go in box 12 code TP, qualified overtime in box 12 code TT, and the tipped occupation code in box 14b.