"One Big Beautiful Bill" Act
The “One Big Beautiful Bill” Act (H.R. 1) was signed into law on July 4, 2025.
Major Takeaways
Employees are NOT going to feel the tax benefit in their regular paychecks. They are going to receive the tax benefit when they file their personal tax returns. It will be important that your employees have access and review their pay stubs and W2s so that they can pull off the pertinent details related to Overtime and Tips. There is still more guidance to be coming on the IRS OBBBA resource page.
The three biggest sections for our clients (and their employees) to focus on are NO TAX ON TIPS, NO TAX ON OVERTIME, and INFORMATION REPORTING THRESHOLD CHANGES. This one increases the 1099 form limit from $600 to $2000, effective January 1, 2026. This one should reduce your administrative burden as an employer related to these annual tax filings.
We will keep you updated with any reporting features offered through isolved, and with any other updates on guidance along the way.
Learning the Deduction Details for Several Provisions
The OBBBA has many provisions, but below are a number of sections which may have a considerable impact on employers and employees. Expand each section to learn the details.
Snapshot
Temporarily exempts up to $25,000 of qualified tips from taxation. Qualified tips are reported as an income tax deduction.
Details
- $25,000 deduction limit
- Deduction begins to phase out when modified adjusted gross income (MAGI) exceeds $150,000 and $300,000 for joint filers.
- Deduction is allowed for non-itemizers.
- Deduction is available to taxpayers with a work-eligible SSN.
- Effective retroactively 1/1/2025 through 12/31/2028
- Transition rule: For cash tips reported prior to 1/1/2026, employers would be permitted to approximate tips “by any reasonable method specified by the Secretary.”
- Deduction is available to “traditional” tipped industries, including beauty service industry.
- Treasury and IRS will provide guidance, including a list of occupations customarily and regularly receiving tips.
- Still subject to state taxes and FICA/Medicate Taxes
Snapshot
FLSA overtime paid in excess of the regular rate is reported as an income tax deduction. Temporarily exempts up to $12,500 in overtime wages ($25,000 for joint filers) from taxation through an above-the-line deduction.
Details
- Deduction is limited to $12,500 and $25,000 for joint filers.
- Deduction phases out when MAGI exceeds $150,000 and $300,000 for joint filers.
- Report qualified OT separately on W-2
- Deduction is allowed for non-itemizers.
- Deduction is available to taxpayers with a work-eligible SSN.
- Effective retroactively 1/1/2025 through 12/31/2028
- Transition rule: For OT reported prior to 1/1/2026, employers would be permitted to approximate qualifying OT “by any reasonable method specified by the Secretary.”
- Treasury and IRS will provide further guidance.
Qualified Overtime for OBBB includes:
- Defined under Section 7 of the FLSA that is in excess of the regular rate, such as time and a half
- Work performed by non-exempt hourly and salary employees in excess of 40 hours in a workweek
- Time & half: Overtime compensation must be paid at a rate of at least 1.5 times the employee’s regular rate of pay
Qualified Overtime does NOT include the following:
- State-REquired Overtime
- Contractual Overtime
- Independent Contractors
ALL COMPANIES SHOULD CONSULT WITH THEIR LABOR ATTORNEY TO MAKE SURE THE CORRECT QUALIFIED OVERTIME IS BEING TRACKED.
The threshold for reporting certain payments and remuneration for services, including payments reported on Forms 1099-MISC and 1099-NEC, increases from $600 to $2,000 for payments made after December 31, 2025. The threshold is expected to be adjusted for inflation annually for any calendar year after 2026.
The Act creates a new custodial account for qualifying children akin to a Section 408(a) IRA, but not a Roth IRA, with a contribution limit of $5,000 (adjusted for inflation).
Optional employer contributions up to $2,500 to the account would be excluded from the employee’s gross income.
Guidance and regulations from the Treasury Department to follow.
By extending and enhancing the paid family and medical leave tax credit, employers may elect to claim the credit based on either a percentage of qualified leave wages or a percentage of insurance premiums paid or incurred for taxable years beginning after December 31, 2025.
The dependent care FSA contribution limit will increase from $5,000 to $7,500 (from $2,500 to $3,750 for married individuals filing separately), effective for taxable years beginning after December 31, 2025.
Permitting telehealth coverage without requiring a deductible under High Deductible Health Plans becomes permanent, retroactive to tax years beginning after December 31, 2024.
Fees for direct primary care service arrangements can be paid from HSAs, with limitations, effective for months beginning after December 31, 2025.
Guidance to Come
The IRS said it will provide guidance for the “no tax on overtime” and “no tax on tips” provisions included in the OBBBA. Both provisions are retroactive to January 1, 2025.
- Transition relief. The fact sheet states the “IRS will provide transition relief for tax year 2025 for taxpayers claiming [these] deduction[s] and for employers and payors subject to the new reporting requirements.”
- Tip occupations list. Employers must file information returns and furnish statements to taxpayers showing certain cash tips received and the occupation of the tip recipient. The fact sheet states that, by October 2, the IRS must publish a list of occupations that “customarily and regularly” received tips.