Compliance

One Big Beautiful Bill Act

On July 4, 2025, President Trump signed H.R. 1, the One Big Beautiful Bill Act (OBBBA), into law [Pub. L. 119-21]. The OBBBA contains many provisions that will affect payroll for years to come. Many questions remain on how to handle provisions from the bill. PayrollOrg will provide information to members as soon as the guidance is available.

No Tax on Overtime, Tips

No tax on overtime (§70202). The OBBBA provides a temporary exemption of federal income taxation of overtime pay. The exemption applies only to the overtime premium. This provision is retroactive to January 1, 2025, and expires on December 31, 2028.

Employers will still withhold federal income tax and social security, Medicare, and FUTA taxes. Taxpayers are responsible for deducting the amount on their individual tax returns.

Transition rule. For qualified overtime compensation reported prior to January 1, 2026, employers would be permitted to approximate a separate accounting of amounts designated as qualified overtime compensation "by any reasonable method specified by the Secretary" of the Treasury.

Limits. The legislation provides eligible individuals a deduction "of an amount equal to the qualified overtime compensation received during the taxable year" up to $12,500 ($25,000 for joint filers). The amount allowed as a deduction will be reduced by $100 for each $1,000 an individual earns above an adjusted gross income of $150,000 ($300,000 for joint filers).

Qualified overtime compensation. The term "qualified overtime compensation" means "overtime compensation paid to an individual required under §7 of the Fair Labor Standards Act of 1938 (FLSA) that is in excess of the regular rate . . . at which such individual is employed." Tips are not included in qualified overtime compensation.

Although specifics are not fully available yet, the "overtime premium" would be limited to the premium portion only – the "half" or 0.5 portion of the time and a half. For example, an employee who is paid $15 per hour would receive $22.50 per hour for overtime. The "overtime premium" eligible for the tax deduction in this instance would be $7.50.

As the OBBBA specifically limits the "qualified overtime compensation" to the standards set forth in the FLSA, overtime required through state laws (such as daily overtime for more than 8 hours worked) and collective bargaining agreements would not be eligible for the tax credit.

The IRS will issue regulations or other guidance to carry out the purposes of this section, including regulations or other guidance to prevent abuse of the deduction allowed by this section.

Employer reporting. The OBBBA includes a requirement to report overtime compensation on Form W-2, Wage and Tax Statement. The IRS has not released guidance on how employers will report qualified overtime compensation.

Withholding. The OBBBA requires the Treasury Secretary to modify the procedures prescribed under IRC §3402(a) for taxable years beginning after December 31, 2025, to account for the deduction allowed under IRC §225. This may result in modifications to Form W-4, Employee's Withholding Certificate, to allow employees to adjust their withholding to account for anticipated overtime compensation.

No tax on tips (§70201). The OBBBA provides a temporary elimination of federal income taxation on "qualified tips" through a deduction on an individual's tax return. The deduction is retroactive to January 1, 2025, and expires on December 31, 2028.

Employers will still withhold federal income tax and social security, Medicare, and FUTA taxes. Taxpayers are responsible for deducting the amount on their individual tax returns.

Transition rule. For cash tips reported prior to January 1, 2026, employers would be permitted to approximate tips "by any reasonable method specified by the Secretary."

Limits. The legislation provides eligible individuals a deduction "of an amount equal to the qualified tips received during the taxable year" up to $25,000. The amount allowed as a deduction will be reduced by $100 for each $1,000 an individual earns above an adjusted gross income of $150,000 ($300,000 for joint filers).

Qualified tips. The law defines "qualified tips" as cash tips received by an individual in an occupation that customarily and regularly received tips on or before December 31, 2024. Cash tips include tips received from customers paid in cash or charged and tips received under a tip-sharing arrangement.

Qualified tips must: be paid voluntarily without any consequence in the event of nonpayment; not be the subject of negotiation; and be determined by the payor. Mandatory service charges and automatic gratuities are not considered qualified tips.

Tips must also be "received in course of trade or business." The IRS is required to provide guidance, including a list of occupations customarily and regularly receiving tips.

*NEW: The OBBBA extends the credit for the employer's portion of social security taxes paid on tips for employees who provide beauty services (barbering, hair care, nail care, esthetics, and spa and body treatments) or provide, deliver, or serve food and beverages for consumption.

TCJA Provisions Made Permanent

The OBBBA makes permanent many provisions from the Tax Cuts and Jobs Act (TCJA) that were to sunset on December 31, 2025. Text for most provisions from the TCJA law has changed from "2018 through 2025" to "beginning after 2017."

Tax rates (§70101). The TCJA retained seven tax brackets but adjusted tax rates and taxable income levels. The OBBBA makes permanent the TCJA's tax rates – 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

As the tax rates are permanent, the two-tiered system for withholding income tax from supplemental wages at a flat rate should remain at TCJA levels as well.

  • Optional flat rate: 22%. The optional flat tax rate on supplemental wages of up to $1 million in a taxable year is tied to a section of the Internal Revenue Code that the TCJA had suspended. The rate should remain at 22% (no other percentage allowed).
  • Mandatory flat rate: 37%. The TCJA had lowered that rate to 37%, which should stay the same under the OBBBA.

The backup withholding rate, which the TCJA had lowered to 24%, should remain at 24%.

Personal exemptions (§70103). The OBBBA eliminates the personal exemption under IRC §151(d)(5) claimed by taxpayers for themselves and their spouse and dependents. The TCJA had a temporary elimination, which resulted in the redesign of Form W-4, Employee's Withholding Certificate. The IRS has not yet said whether it will require every employee to use the newer Form W-4 format, which was introduced in 2020.

Child tax credit (§70104). The child tax credit under IRC §24(h) is increased to $2,200 from $2,000 per qualifying child. The amount will be adjusted annually by the cost of living rounded to the next multiple of $100.

Paid family and medical leave credit (§70304). The TCJA created a tax credit under IRC §45S for employers that provide leave to their employees, and the OBBBA permanently extended the credit. The TCJA had created a tax credit for employers that provide leave to their employees that was equal to 12.5% of wages paid to employees on Family and Medical Leave Act (FMLA) leave if the employees were paid at least 50% of their normal wages. The tax credit increased by 0.25% for each percentage point that wage payments exceeded 50%. The maximum employer tax credit was 25% of wages paid to employees.

The credit was applied to wages paid for up to 12 weeks of FMLA leave. Employers also had to create a written policy that granted full-time workers at least 2 weeks of paid family and medical leave. Part-time employees were eligible on a proportional basis. Employees also had to have been employed for at least 1 year, and they must earn less than 60% of the highly compensated employee threshold.

The OBBBA makes the tax credit permanent and lowers the requirement for employees to be employed for 6 months instead of 1 year. The OBBBA also allows state and local mandated paid leave to count toward the eligibility for the tax credit. Employers may only claim a credit for the amount of paid leave that exceeds the state or local mandated amounts. The OBBBA allows employers to claim a credit for premiums paid toward qualifying paid leave insurance policies.

Meals and eating facility deduction under IRC §274 (§70305). Under the TCJA, employers were generally allowed to deduct 50% of the food and beverage expenses associated with operating their trade or business (e.g., meals consumed by employees on work travel). The TCJA also expanded this 50% limitation to expenses of the employer associated with providing food and beverages to employees through an eating facility that meets requirements for de minimis fringe benefits and for the convenience of the employer. The OBBBA makes these deductions permanent.

*NEW: Meals provided on certain fishing boats and at some fish-processing facilities are not subject to the 50% limitation after December 31, 2025, and, therefore, are 100% deductible.

Moving expenses under IRC §132 (§70113). The OBBBA makes the TCJA's temporary elimination of the exclusion from employees' income for qualified moving expense payments and reimbursements made by employers permanent. Moving expense deductions are no longer allowed unless specifically authorized by Congress.

*NEW: The OBBBA extends the exclusion for moving expenses for members of the U.S. Armed Forces on active duty who move because of a permanent change of station to include members of the intelligence community who move pursuant to a change in assignment.

Qualified transportation fringe benefits (§70112). The TCJA eliminated the business tax deduction that employers were allowed for the costs incurred by the employer to provide qualified transportation fringe benefits (qualified parking, transit passes, and van pools) to their employees. In addition, the TCJA provision that temporarily suspended the exclusion from income for qualified bicycle commuting reimbursements was made permanent by the OBBBA.

Other Provisions That Affect Payroll

Dependent care assistance program (§70404). For tax years beginning after December 31, 2025, the OBBBA increases the excluded amount of dependent care assistance to $7,500 in a year ($3,750 for married individuals filing separately) or the employee's earned income for the year, whichever is less.

Employee retention credit (§70605). The OBBBA includes penalties for employee retention credit (ERC) promoters (except for certified professional employer organizations), an expansion of IRS assessment authority, and a longer statute of limitations.

The OBBBA also bars any ERC or refund unless the claim was filed by January 31, 2024. The OBBBA extends the statute of limitations for the IRS to assess ERC claims for the third and fourth quarters of 2021. The IRS has 6 years (instead of 5 years) from the date of the ERC's filing to assess and audit claims from these two quarters. The statute of limitations for ERC claims filed for 2020 and the first and second quarters of 2021 did not change and remains at 3 years.

Employer-provided child care credit (§70401). The OBBBA increases the employer-provided child care tax credit, which is an incentive for businesses to provide child care services to employees. The credit is increased to 40% (50% for eligible small businesses) from 25%. The credit is increased to $500,000 from $150,000 per year ($600,000 for eligible small businesses) and will be adjusted annually for inflation after 2026.

An eligible small business has gross receipts of less than $25 million (adjusted annually for inflation) based on the 5-year period preceding the taxable year. In 2025, the small business threshold is $31 million. Small businesses may pool their resources to provide employee child care. Businesses may use a third party to provide child care.

Form 1099-K reporting (§70432). The OBBBA reinstates the exceptions for reporting de minimis payments that were changed by the American Rescue Plan Act of 2021. IRC §6050W will now apply to reporting on Form 1099-K, Payment Card and Third Party Network Transactions, with the previous threshold of $20,000 and 200 transactions.

Forms 1099-MISC and 1099-NEC reporting (§70433). The OBBBA increases the reporting threshold for reporting on Forms 1099-MISC, Miscellaneous Information, and Forms 1099-NEC, Nonemployee Compensation, from $600 to $2,000. This provision is effective beginning with payments made in 2026 and will be subject to inflation adjustments beginning in 2027.

Student loans (§70412). The OBBBA makes permanent the temporary Coronavirus Aid, Relief, and Economic Security (CARES) Act provision allowing qualified employer-provided student loan repayment assistance to be treated as qualified educational assistance under IRC §127. In 2026, the limit for qualified educational assistance will be adjusted for inflation in multiples of $50. The current limit is $5,250.

Trump accounts (§70204). The OBBBA allows for the creation of an individual retirement account for children born between January 1, 2025, and December 31, 2028. After an initial $1,000 deposit by the federal government, parents may contribute up to $5,000 per year to the account and employers may contribute up to $2,500 to the account of an employee or the employee's dependent. Employer contributions are excluded from the employee's income.