Key Takeaways
Summary | |
Definition | The One Big Beautiful Bill Act (OBBBA) is a 2025 federal law introducing major tax and benefits changes affecting employers, employees, and contractors. |
Payroll Tax Changes | The Act allows temporary tax deductions for qualified overtime pay and qualified tips, with new reporting requirements for W-2s, 1099-NECs, and Forms W-4. |
Business Tax Relief | Full expensing of U.S.-based R&D costs is restored, with retroactive relief available for eligible small businesses. |
Benefits Updates | HSAs are expanded to cover more plan types and services, Dependent Care FSA limits increase, and student loan repayment tax benefits are made permanent. |
Employer Credits | The paid family and medical leave tax credit is extended and enhanced, offering higher credits for qualifying employers. |
Purpose | Helps businesses reduce tax liability, improve cash flow, and stay compliant amid new payroll, benefits, and reporting rules. |
On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBBA) into law. This lengthy piece of legislation includes several provisions that affect employers, employees, and independent contractors—luckily, we read through it, so you don’t have to.
Below, we get into parts of the bill that business owners need to understand to keep your operations running smoothly. (Keep in mind that this post doesn’t detail every provision in the bill, but dives into sections that impact American businesses.) Let’s get into it.
Changes to taxes on overtime
Eligible workers who receive overtime pay can deduct up to $12,500 (per year) of their overtime pay earned under federal guidelines (joint filers can deduct up to $25,000 per year).
Need a quick refresher on overtime pay? The Fair Labor Standards Act (FLSA) instructs employers to pay overtime compensation to any employee who works more than 40 hours in any workweek. Note that state rules may vary. Overtime compensation is equal to 1.5 times the rate of regular pay; the overtime premium is the 0.5 portion of the overtime pay. |
Here are a few key facts to keep in mind:
The deduction only applies to “qualified overtime;” this refers to overtime compensation that is paid out in accordance with the FLSA. So, if an employer has an individualized contract with an employee that includes a custom overtime compensation agreement, the tax deduction will not apply on any amount that exceeds overtime required by FLSA. Additionally, any overtime paid out in accordance with state law (rather than the FLSA, which is federal law), cannot be included in the deduction.
The deduction does not apply to workers who are considered highly compensated—it phases out higher earners. Here’s how it works: The threshold income amount is $150,000 AGI ($300,000 for joint filers). The deduction is reduced by $100 for every $1000 that exceeds the threshold amount.
Anyone claiming the deduction must include their Social Security number on their tax return. Joint filers must include both Social Security numbers.
How can employees claim this deduction? Easy. Simply deduct this amount from your taxable income when filing your individual tax return.
Keep in mind that this benefit will expire—the deduction will be in effect for the following tax years:
2025
2026
2027
2028
What this deduction means for employers: Be sure to keep accurate and organized records on overtime; any errors could mean a compliance violation.
For Tax Year 2025, the IRS will be flexible on the calculation and the reporting of the qualified overtime. Employers are asked to provide their employees with a reasonable approximation of their annual qualified overtime premiums (the 0.5 portion of the overtime pay). This information can be provided to employees on the last paystub for the year, in Box 14 of the Form W-2, or on another document.
For Tax Years 2026, 2027, and 2028:
Employees can choose to add their estimated overtime on their Form W-4, on Line 4b to reduce their tax withholding on each payroll in 2026.
Employers must report qualified overtime in Box 12 of the employee’s W-2, using the appropriate code once it’s finalized.
Businesses must report qualified overtime pay to contractors (should be very rare) in a new Box 1d of a contractor’s 1099-NEC form
Changes to taxes on tips
The OBBBA also allows for a tax deduction on qualified tips. Here is how it works:
Just like in the case of the overtime compensation deduction discussed above, high earners are phased out of the deduction. The threshold is $150,000 AGI (or $300,000 in the case of a joint return), and the deduction amount is reduced by $100 for every $1000 that is in excess of the threshold.
Qualified tips are:
An amount that is determined by the payor.
Paid by the payor voluntarily (there must be no consequences of not tipping).
Not subject to negotiation.
Not part of any mandatory service charge imposed by the vendor.
May include tips earned from tip pooling arrangements.
The deduction is capped at $25,000
Self-employed individuals may deduct tips, but the deduction cannot exceed their gross income.
Tips earned from specified service trades or businesses (SSTBs) are not eligible as qualified tips. These businesses include (but are not limited to):
Law
Investing, investment management financial services
Performing arts
Athletics
Accounting
Health
To qualify for the deduction, the taxpayer must be in an occupation which customarily and regularly received tips on or before December 31, 2024. A list of approved occupations can be found here.
In order to qualify for the deduction the taxpayer must include their social security number on the tax return (if filing jointly, both partners must include their SSNs).
Taxpayers can claim this deduction on their individual tax return.
Keep in mind that this benefit will expire—the deduction will be in effect for the following tax years:
2025
2026
2027
2028
What this deduction means for employers: Be sure to keep accurate and organized records on tips and abide by new reporting requirements.
For Tax Year 2025, the IRS will be flexible on the calculation and the reporting of the qualified tips. Businesses are asked to provide their employees and independent contractors with a reasonable approximation of their annual qualified tips. This information can be provided to employees on the last paystub for the year, or on another document (additional IRS guidance is pending).
For Tax Years 2026, 2027, and 2028:
Employees can choose to add their estimated tips on their Form W-4, on Line 4b to reduce their tax withholding on each payroll in 2026.
Employers must report qualified tips in Box 12 using the appropriate code once it’s finalized of the employee’s W-2, and report a new Treasury Tipped Occupation Code (TTOC) in a new Box 14b.
SSTBs may be required to report the non-qualified tip income separately (additional IRS guidance is pending).
Businesses must report qualified tips in a new Box 1b of a contractor’s 1099-NEC, and report a new Treasury Tipped Occupation Code (TTOC) in a new Box 1c.
Research & development expenses (174 expenses)
The Act restores full expensing of R&D expenditures. Let’s review what this means.
Need a refresher on the R&D tax credit? This federal credit provides businesses with an opportunity to reduce their tax liability by enabling businesses doing qualified research to offset federal income or payroll taxes. |
Let’s take a step back and briefly review the history of R&D expense treatment before diving into how the OBBBA has changed things for businesses.
Before Tax Year 2022: Businesses had a choice to either:deduct R&D expenses in the year they were spent, or spread them out over at least five years. |
Starting in Tax Year 2022: Businesses could no longer deduct all R&D expenses in the year they incurred them. Instead, businesses were required to spread them out (amortize them) over:Five years for R&D done in the U.S.Fifteen years for R&D done outside the U.S. |
Now, after the passing of the OBBBA: The new Act allows businesses to once again deduct all R&D expenses in the year they are spent (as long as the research is done within the U.S. Deductions for any R&D performed in foreign countries must be spread out over 15 years). This is effective for tax years beginning after December 31, 2024. Additionally, expenses previously amortized under the 2022 change but not fully deducted can be deducted on the following year’s tax return.The change is retroactive for small businesses (currently, those with average annual gross receipts of less than $31 million), allowing for immediate expensing to be claimed on an amended return for tax years 2022 through 2024. |
What this means for employers: An immediate deduction may improve cash flow. It’s imperative that business owners accurately track R&D expenditures based on research performed in the U.S. vs. research done abroad. Small businesses can amend prior years and immediately deduct research expenses, potentially receiving a refund.
Changes to HSAs and Dependent Care FSAs
The bill includes key changes to health benefit plans.
Bronze and Catastrophic plans purchased on exchange are now HSA eligible.
HSA funds (up to $150 individual/$300 family per month) can be used towards a DPC (direct primary care) arrangement.
An existing arrangement was extended, so a user can be HSA eligible even if their HDHP plan waives the deductible for telehealth visits (this has been in place since 2020 but was set to expire this year).
The cap on Dependent Care Flexible Spending Accounts (FSAs) has been increased to $7500 from $5000, which is the first increase since the 1980s. This cap is set by statute and not indexed for inflation.
Tax credit for paid family and medical leave
The bill extends and enhances the employer tax credit for paid family and medical leave. Let’s get into how it works.
Eligible employers will receive a tax credit that is equal to 40% of wages paid out (that percentage jumps to 50 for small businesses—the definition of a small business is one that has generated $29M or less in revenue over the last five years). In order to be eligible, employers must:
Offer at least two weeks of paid family and medical leave to eligible employees (these must be full-time employees, and must have been employed at the organization for at least 6 months).
Pay 50% or more of their workforce their regular rate over the course of their leave.
Have a documented paid medical and family leave policy in place.
This tax credit is non-refundable and will be available in all 50 states. The maximum credit amount is $500,000 ($600,000 for small businesses). This tax credit will go into effect after December 31, 2025.
What this means for employers: You’re eligible to get a higher tax credit—yay! Be sure to keep organized and accurate records.
Childcare tax credit
The bill increases the child tax credit from $2,000 to $2,200 per child and the refundable portion of the credit will be bumped up to $1,700 starting in tax year 2025.
Need a refresher on the Childcare Tax Credit? This tax credit is aimed at helping families with dependent children under the age of 17 with a valid social security number. |
Student loan repayment
The bill makes permanent a tax break that was set to expire by the end of the year. The tax break indicates that employees can use up to $5,250 per year of their compensation to repay student loans—and this amount will not be subject to federal income payroll taxes.
What this means for employers: If you were already providing this benefit, nothing needs to change. If not, consider offering it.
Other provisions
The OBBBA also includes the following provisions—these can get quite complicated, so be sure to consult an expert on how these may affect your business:
Business interest deduction: The Act makes permanent the pass-through business income deductions that were set to expire by the end of the year. The bill also restores the pre-2022 definition of adjusted taxable income, which includes an add-back for depreciation, amortization, and depletion—resulting in a larger income base against which the 30% limitation was calculated.
Increased spending limits: The annual expensing limit for certain business property has been increased to $2.5 million (up from $1.5 million), and the phaseout threshold has been raised to $4 million.
So, there you have it—after months of speculation, the bill has been signed into law. Be sure to consult an expert to understand how the changes detailed above may impact your business, and how you can use new tax breaks to your advantage. (And, don’t forget that this post does not detail every provision in the bill—it’s a long one!). Additionally, IRS regulations and guidance are still pending related to several of the provisions. Some of the information is subject to change as new guidance is published. Monitor this IRS site: https://www.irs.gov/newsroom/one-big-beautiful-bill-provisions for more news regarding this bill.
