By Rena Pirsos, JD, Brightmine Legal Editor
On July 4, President Trump signed into law the administration‘s principal domestic policy bill, H.R. 1, known as the One Big Beautiful Bill Act (OBBBA).
The OBBBA is a wide-ranging law that covers everything from nutrition and defense to taxes. Several of the tax provisions fulfill Trump’s campaign pledges to repeal taxes on tips and overtime, and to make permanent certain provisions affecting fringe benefits that would have started to expire at the end of 2025.
The following overview explains how the OBBBA directly impacts an employer’s payroll operations.
No taxes on tips
The OBBBA provides above- and below-the-line deductions for up to $25,000 per tax year in tips on a worker’s personal income tax return, Form 1040, effective for tips received in 2025 through 2028. Since the OBBBA does not exclude tips from the definition of wages subject to withholding, tips remain subject to employer withholding for income and Social Security and Medicare (FICA) tax and federal unemployment insurance (FUTA) taxes.
For employers, nothing will change except that they must report the tips on Form W-2 (before the OBBBA, only Social Security-taxable tips had to be reported on the W-2). Since the OBBBA was enacted midyear, employers can estimate tips on the 2025 Form W-2.
No taxes on federal overtime
Like the tax exclusion for tips, effective beginning in 2025 and ending in 2028, the OBBBA provides above- and below-the-line deductions on an employee’s Form 1040 for up to $12,500 in federal overtime, and up to $25,000 for married employees who file joint returns. Overtime remains subject to income and FICA withholding and to FUTA taxes.
An employer must report any overtime on an employee’s Form W-2 and may estimate it for 2025.
New withholding tables?
For both the tax exclusion for tips and overtime, the OBBBA instructs the IRS to modify the current withholding tables and procedures to account for these deductions, but what that means is not yet clear.
Dependent care assistance
Effective for plan years starting on or after January 1, 2026, the maximum amount employees may exclude from taxable income for dependent care benefits per year increases from $5,000 a year to $7,500.
Educational assistance
The OBBBA makes permanent the provision of IRC § 127 that allows an employer to pay back an employee’s student loans on a tax-free basis up to $5,250 a year. This limit will be inflation-adjusted, beginning in 2027.
Information reporting
Effective for payments made to independent contractors made in 2026, the amount triggering Form 1099-NEC reporting will increase to $2,000, from $600. This increase will also apply to Form 1099-MISC reporting and backup withholding. The $2,000 reporting threshold will be adjusted for inflation beginning in 2027.
Employee Retention Credit (ERC)
The OBBBA imposes a cut-off date of January 31, 2024, for the IRS to process Forms 941-X on which the ERC is claimed for the third quarter of 2021. However, employers that filed Forms 941-X after January 31, 2024, but before the three-year statute of limitations expired on April 15, 2025, and received their credit can keep it. The law also increases the statute of limitations for the IRS to claw back credits.
TCJA’s suspensions are permanently repealed
Effective starting with tax year 2026, the OBBBA makes permanent the Tax Cuts and Jobs Act of 2017’s (TCJA’s) suspension of miscellaneous itemized deductions (e.g., employer-provided meals) and the income tax exclusions for qualified bicycle commuting fringe benefits and employer reimbursement of employees’ qualified moving expenses (except for members of the armed forces and certain members of the intelligence community).
PFML credit
The OBBBA also makes permanent the paid family and medical leave (PFML) tax credit and allows it to be claimed for an applicable percentage of premiums paid for insurance policies that provide PFML for qualifying employees, effective starting with tax year 2026.
You may also be interested in…
About the author
Rena Pirsos, JD
Legal Editor, Brightmine
Rena Pirsos has more than 30 years of experience in legal publishing. At Brightmine, she covers topics related to payroll, including income and employment tax withholding, depositing and reporting; taxation of employee compensation and benefits; wage payments; child support and garnishment order compliance; and international payroll issues.
Rena holds a Juris Doctor degree from Hofstra University School of Law and a Bachelor of Arts degree in psychology and French literature from Fordham University’s College at Lincoln Center. Prior to joining Brightmine, she was managing editor for the American Payroll Association and developed and co-authored many of its core publications. In earlier years, she was managing editor of the UCC Law Journal and Banking Law Journal at Warren Gorham Lamont/Thomson Professional Publishing, and a legal editor for Thomson Reuters’ Payroll Guide, Prentice Hall’s guides to federal, state and local income tax, and CCH/Wolters Kluwer Federal Securities Law Reports.
See our extensive HR resources and expertise
In an ever-changing regulatory environment, we have everything you need to stay in control and compliant.