Compliance

One Big Beautiful Bill Act

On July 4, 2025, President Trump signed H.R. 1, known as 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. PayrollOrg will provide information to members as soon as the guidance is available.

Three of the big changes brought about by the OBBBA will affect Form W-2 reporting for tax years 2025-2028.

No Tax on Overtime, Tips
On July 14, 2025, the IRS published Fact Sheet 2025-03, which discusses four main provisions that are effective for 2025 through 2028. Two are relevant to payroll: no tax on tips and no tax on overtime.

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 and Medicare taxes. Taxpayers are responsible for deducting the amount on their individual tax returns.

The IRS updated its FAQs about qualified overtime compensation on August 6, 2026. Detailed information was added for employers and payors of qualified overtime compensation on reporting requirements for Form W-2, Wage and Tax Statement, Form 1099-MISC, Miscellaneous Information, and Form 1099-NEC, Nonemployee Compensation. Information was also added on coverage and exemptions under the Fair Labor Standards Act (FLSA), federal income tax withholding procedures for qualified overtime compensation, and issues applicable to federal employees.

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). Married taxpayers must file jointly to receive the deduction. The deduction is not available for a married taxpayer who files separately.

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.

The "overtime premium" is 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 are not eligible for the tax credit.

State and local government employees. Qualified overtime compensation for employees who receive compensatory time off in accordance with 29 USC §207(o) is paid when the employee is paid wages for accrued compensatory time taken during the course of employment (e.g., a day off) or is paid out accrued compensatory time upon termination of employment. Qualified overtime compensation is not paid when the employee earns the compensatory time off.

Employer reporting. The OBBBA includes a requirement to report overtime compensation on Form W-2, Wage and Tax Statement. On January 9, 2026, the IRS released the 2026 Form W-2. The form has new Box 12 Code TT for employers to enter the total amount of qualified overtime compensation. In its updated FAQs, the IRS stated that if an employer discovers an error on Form W-2, Box 12, Code TT, the employer must file Form W-2c, Corrected Wage and Tax Statement, with the Social Security Administration and furnish the Form W-2c to the employee as soon as possible. An employer that files or furnishes an incorrect Form W-2 may be subject to information reporting penalties under IRC §§6721 or 6722, including reduced penalties for timely corrections.

Withholding. The 2026 Form W-4, Employee's Withholding Certificate, has been updated to allow employees to adjust their withholding to account for anticipated overtime compensation. The Deductions Worksheet now has lines for employees to enter qualified tips (Line 1(a)) and overtime compensation (Line 1(b)).

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, social security and Medicare taxes. Taxpayers are responsible for deducting the amount on their individual tax returns.

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). IRC §224(f) requires married taxpayers to file returns jointly to receive the deduction. The deduction is not available for a married taxpayer who files separately.

Qualified tips. On April 13, 2026, the IRS issued final regulations to provide guidance on the "no tax on tips" provision. The final regulations adopt the definition of "tips" from the proposed regulations: "Tips are amounts paid by customers for services that are in excess of the amount agreed to, required, charged, or otherwise reasonably expected to have to be paid for the services in an arm's-length transaction." Whether the tip is a "qualified tip" depends on if the other requirements under IRC §224 and the final regulations are satisfied.

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.

"Cash tips" must be paid in a cash medium of exchange, such as cash, check, credit card, debit card, gift card, tangible or intangible tokens that are readily exchangeable for a fixed amount in cash (such as casino chips), or another form of electronic settlement or mobile payment application denominated in cash. Cash tips include foreign currency. Cash tips would not include items paid in any medium other than cash, such as event tickets, meals, services, or other assets that are not exchangeable for a fixed amount in cash (such as most digital assets).

Tips received under tip-sharing arrangements count. Participation in a tip-sharing arrangement by itself is not enough for an employee to qualify. The employee must also be in an occupation on the List of Occupations That Receive Tips and meet all other statutory and regulatory requirements.

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. Any amounts received for illegal activity, prostitution services, or pornographic activity are not qualified tips.

Tips must also be "received in course of trade or business." The OBBBA provides that tips do not qualify for the deduction if they are received in the course of certain specified trades or businesses. Qualified tips do not include those received in the course of a trade or business that is a specified service trade or business (SSTB). An SSTB is any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners, or that involves the performance of services that consist of investing and investment management, trading, or dealing in securities, partnership interests, or commodities.

Employer reporting. Employers are already required to report tips to employees on Form W-2. The 2026 Form W-2 adds Box 12 Code TP to report the total amount of cash tips reported to the employer. Cash tips includes tips received in cash, charged, or under a tip-sharing arrangement.

The 2026 Form W-2 splits Box 14 into two parts. Employers will use Box 14b to report up to two Treasury Tipped Occupation Codes (TTOCs) for an employee's tipped occupations. Employees will use these codes and the amount of tips reported in Box 12 under Code TP to determine their qualified tip deduction. If an employer enters 000 as the TTOC and no other code in Box 14b, the cash tips are not qualified tips.

On April 13, 2026, the IRS finalized regulations that include the list of tip occupations that customarily and regularly received tips on or before December 31, 2024. The final regulations list more than 70 separate occupations of tipped workers categorized by a TTOC. Each occupation has a three-digit TTOC and is grouped into one of eight categories.

*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.

Trump Accounts
OBBBA §70204 allows for the creation of an individual retirement account for eligible children. These Trump accounts (also known as §530A accounts) must have a separate written plan and are not subject to ERISA. Amounts generally cannot be withdrawn from Trump accounts before January 1 of the calendar year in which the child turns 18 years old. After then, the account will be treated as a traditional IRA and will be generally subject to the same rules as other traditional IRAs.

Employers may contribute to the Trump account of an employee or an employee's dependent. The OBBBA added IRC §128, which sets forth rules for employer contributions. Employers will use new Box 12 Code TA to report employer contributions to Trump accounts of an employee or dependent of an employee that are paid pursuant to a §128 Trump account contribution program.

In general, contributions are subject to an annual limit of $5,000. Under IRC §128, employer contributions up to $2,500 annually per employee (not per dependent) are not included in the employee's income. If an employer contributes more to a Trump account, it must treat that amount as gross income and wages to the employee rather than as a §128 contribution. Both annual limits will be adjusted for inflation.

As part of the pilot program, eligible children born between 2025-2028 who are United States citizens and have a valid social security number can receive a one-time $1,000 contribution from the government when their account is established. Employers that choose to match the government's $1,000 contribution under the pilot program would be able to exclude this amount from the employee's gross income, although the match would count toward the program's $2,500 limit for the taxable year.

Under the August 2026 proposed regulations, employees would be allowed to fund a §128 contribution to a dependent's Trump account via salary reduction under a §125 cafeteria plan. Employees cannot use a §125 cafeteria plan to contribute to their own Trump accounts. A cafeteria plan that includes §128 contributions would be required to allow an employee to change or revoke elections at least monthly.

IRS Releases 2026 Forms, Publications With OBBBA Updates
The IRS has released many 2026 forms and publications that include changes made by the OBBBA. Forms and publications are available in PayrollOrg's Resource Library.

2026 Form W-4. The Form W-4 has been updated to account for the federal income tax deductions for qualified tips and qualified overtime compensation. The Deductions Worksheet for Step 4(b) has been moved it its own page and now has 15 lines. Lines were added for employees to enter qualified tips and overtime compensation. Employees can use Line 1(a) to enter an estimate of their qualified tip income and Line 1(b) to enter an estimate of any qualified overtime compensation. Employees may use the IRS's tax withholding estimator when completing Forms W-4 or W-4P, which has been updated to help taxpayers account for all OBBBA credits and deductions.

2026 Form W-2. On January 9, 2026, the IRS released the 2026 Form W-2 with these changes due to the OBBBA:

  • New Box 12 codes. Box 12 has three new codes: TA – Employer contributions to a Trump account; TP – Total amount of cash tips reported to the employer; and TT – Total amount of qualified overtime compensation.

    In its updated OBBBA FAQs, the IRS stated that if an employer discovers an error on Form W-2, Box 12, Code TT, the employer must file Form W-2c, Corrected Wage and Tax Statement, with the Social Security Administration and furnish the Form W-2c to the employee as soon as possible. An employer that files or furnishes an incorrect Form W-2 may be subject to information reporting penalties under IRC §§6721 or 6722, including reduced penalties for timely corrections.

  • Tip reporting. Box 14 is now 14a – Other and 14b – Treasury tipped occupation code. Employers may use Box 14a to report information such as state disability insurance taxes withheld, union dues, uniform payments, health insurance premiums deducted, nontaxable income, or educational assistance payments.

    Employers will use Box 14b to report up to two treasury occupation codes for an employee's tipped occupation. The codes will be used to determine whether the employee is in an occupation eligible for the deduction for qualified tips (reported in Box 12 with code TP). The same Box 14 changes were included in the 2026 Form W-2c.

Forms 1099-MISC, 1099-NEC. The IRS updated Form 1099-MISC, Miscellaneous Information, and Form 1099-NEC, Nonemployee Compensation, along with the Instructions for Forms 1099-MISC and 1099-NEC for OBBBA reporting requirements.

  • Form 1099-MISC includes two new boxes: Box 13a – Cash tips and Box 13b – Treasury Tipped Occupation Codes (TTOC). Box 14, which was previously reserved for future use, is now used to report qualified overtime compensation.

  • Form 1099-NEC includes similar new boxes: Box 1b – Cash tips; Box 1c – TTOC; and Box 1d - Overtime compensation. Box 1 - Nonemployee compensation - was renumbered to Box 1a.

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%.

The two-tiered system for withholding income tax from supplemental wages at a flat rate remains 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. Under the OBBBA, the rate remains at 22% (no other percentage allowed).
  • Mandatory flat rate: 37%. The TCJA lowered the mandatory flat rate to 37%, which stays the same under the OBBBA.

The backup withholding rate, which the TCJA lowered to 24%, remains at 24% under the OBBBA.

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). Effective January 1, 2026, employers may no longer deduct the cost of meals provided to employees through an employer-operated eating facility or for meals provided for the convenience of the employer. The OBBBA carved out a limited exception to this rule. Meals provided on certain fishing boats and at some fish-processing facilities may be 100% deductible for the employer. This change does not affect the employee exclusion from income for employer provided meals.

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. The intelligence community allowance is in effect after December 31, 2025.

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 temporarily suspended the exclusion from income for qualified bicycle commuting reimbursements. Both were 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.

Direct primary care service arrangements (§71308). OBBBA amends IRC §223(c)(1) by adding paragraph (E), which allows direct primary care service arrangements to be compatible with health savings accounts (HSAs). Effective after December 31, 2025, direct primary care arrangements will be eligible for HSA coverage, as long as the membership fee does not exceed $150 per month for an individual ($300 per month if the arrangement covers more than one person).

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. The IRS issued FAQs about ERC claims.

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. The IRS finalized regulations that amend the threshold for when third-party settlement organizations are required to perform backup withholding. 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 for certain payments. This provision is effective beginning with payments made in 2026 and will be subject to inflation adjustments beginning in 2027. Publication 1099, General Instructions for Certain Information Returns, includes a table with reporting threshold amounts.

High deductible health plans (§71306). OBBBA amends IRC §223(c)(2)(E) to clarify that a health plan can still be considered a high deductible health plan (HDHP) even if it offers telehealth and other remote care services without requiring a deductible. This allows employers to provide telehealth and other remote care services to HDHP participants on a pre-deductible basis without causing employees to become ineligible to contribute to HSAs. This amendment applies to plan years beginning after December 31, 2024, and retroactively makes permanent the same provision from the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Student loans (§70412). The OBBBA makes permanent the temporary CARES Act provision allowing qualified employer-provided student loan repayment assistance to be treated as qualified educational assistance under IRC §127. In 2027, the limit for qualified educational assistance will be adjusted for inflation in multiples of $50. The current limit is $5,250.

Sample Letter Explaining 2026 Tax Withholding Updates to Employees
PayrollOrg created a letter employers can give employees to help them update their income tax withholding to account for changes due to the OBBBA. Employees who want to account for the OBBBA deductions in the income tax withheld from their paychecks must submit a new 2026 Form W-4.
Download Letter

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