The One Big Beautiful Bill Act (OBBBA) introduced a broad range of changes that impact payroll and employee benefits provisions. The provisions most likely to affect employers and employees are discussed below.
No Tax on Tips (2025–2028)
The OBBBA provides a new personal federal income tax deduction for individuals (not for employers) of up to $25,000 in “qualified tips” per year, regardless of whether the individual itemizes deductions.
Only individuals working in occupations that customarily and regularly received tips before Dec. 31, 2024, are eligible for the deduction. The IRS on September 22, 2025, published proposed regulations identifying the occupations that customarily and regularly received tips before December 31, 2024. For a detailed discussion of the proposed regulations, see IRS Lists Jobs that Qualify for OBBBA’s “No Tax on Tips”.
The deduction begins to phase out at $150,000 adjusted gross income (AGI) ($300,000 for joint filers), with a $100 reduction per $1,000 over the threshold.
New Form W-2, Form 1099-NEC, and/or Form 4137 reporting requirements for “qualified tips” will start in 2026. For calendar year 2025, employers must approximate the amount of “qualified tips” earned by eligible individuals from January 1, 2025 (i.e., before OBBBA became law on July 4, 2025) and must report that amount to the affected individuals. Some employers may want to report that amount in Box 14 of Form W-2 (Other) or give workers a separate statement setting out the “qualified tips” amount.
BDO Insight: This is a temporary income tax deduction for individuals to take on their personal federal income tax returns. It is not an exclusion from all federal taxes. Tips remain subject to federal income and employment tax withholding and benefit plan compensation rules.
No Tax on Overtime (2025–2028)
The OBBBA introduces a new personal federal income tax deduction of up to $12,500 per year ($25,000 for joint filers) for “qualified overtime compensation” to be reported on Form 1040 without regard to whether the individual itemizes deductions.
Only federal Fair Labor Standards Act (FLSA)-required overtime -- not state/local or contractual overtime – is eligible for this deduction. Qualified overtime compensation includes only the compensation from the additional rate (such as the “half” in “time-and-a-half”).
As with the deduction for qualified tips, the deduction for overtime pay begins to phase out at $150,000 AGI ($300,000 for joint filers), with a $100 reduction per $1,000 over the threshold.
On August 15, 2025, the IRS released a draft 2026 Form W-2 that adds a new Box 14b for the tipped occupation code, which will be used to report the deduction for qualified tips on Form 1040, Schedule 1-A. Box 14 (Other) has been renumbered as Box 14a on the draft 2026 Form W-2. However, there are no new boxes for qualified overtime or qualified tips. Instead, there are new codes for Box 12 for those items, as well as a new code for contributions to a “Trump account.”
Employers should consider:
- Tracking FLSA-required overtime separately.
- Consulting with labor counsel to distinguish FLSA from state/local mandated overtime.
- Updating payroll and recordkeeping for new reporting.
- Using W-2, Box 14 (Other) to report “qualified overtime” for 2025. Some payroll providers are considering providing a separate statement instead of using Box 14. For independent contractors, companies may need to provide a separate statement, because the 2025 Form 1099-NEC does not have an “Other” box and they must approximate the amount of qualified overtime for 2025, based on forthcoming IRS guidance.
Workforce Provisions
The OBBBA enhanced and made permanent the following workforce provisions:
- Student Loan Repayment: The OBBBA made permanent the annual exclusion for employer-provided education and tuition assistance under Section 127, allowing employers to cover up to $5,250 tax-free (indexed for inflation from 2026).
- Moving Expenses: These expenses remain taxable to employees (except for military/intelligence personnel).
- Meal Expenses: The OBBBA creates narrow exceptions to the disallowance of deductions for meals provided to employees at the convenience of employers, which is scheduled to take effect in 2026 (exceptions are for meals sold in a bona fide transaction or provided on certain Alaskan fishing vessels).
- Bicycle Commuting: The law makes the repeal of the exclusion for bicycle commuting reimbursements permanent.
- Paid Family & Medical Leave Credit: The expanded credit is now permanent, and includes amounts paid for state-mandated paid leave and insurance premiums (from 2026).
- Employer-Provided Child Care Credit: The credit amount is Increased to $500,000 ($600,000 for small businesses), up to 40–50% of expenses.
- Dependent Care Flexible Spending Accounts: The OBBBA increased the annual contribution limit for dependent care FSAs to $7,500 ($3,750 for married filing single) from 2026.
- Telehealth: The OBBBA provides a permanent extension of the first-dollar coverage for high-deductible health plans (HDHPs).
- Direct Primary Care: The OBBBA provides that using health savings account (HSAs) to pay for direct primary care is not disqualifying for HSA eligibility; such payments are now treated as a medical expense.
Given the breadth of these changes, employers should review and update benefit plan documents, payroll systems, and employee communications.
Higher 1099-NEC & 1099-MISC Threshold
The OBBBA introduced significant changes to the reporting thresholds for Form 1099 NEC and Form 1099 MISC. For payments after Dec. 31, 2025, the threshold increased from $600 to $2,000 (indexed for inflation from 2027). However, this change does not increase the W-2 threshold reporting amount.
As a result of this change, employers should:
- Review payment processes for 2026 and beyond.
- Update vendor and contractor onboarding procedures.
Other Notable Changes
Among the many changes made by the OBBBA to payroll and employee benefits provisions, the following should be noted:
HSA-Compatible HDHPs: Bronze and catastrophic ACA exchange plans now qualify as HDHPs for HSA purposes (from 2026).
Trump Accounts: This new savings vehicle is aimed at U.S. citizen children under 18 with Social Security numbers. Parents may make contributions of up to $5,000/year (indexed), and employers may contribute up to $2,500 tax-free. No contributions may be made before July 4, 2026. Employers should consider offering this option as a new benefit and prepare plan documents that comply with nondiscrimination rules.
IRC Section 162(m) No Deduction for Executive Compensation Over $1 Million/Year: The OBBBA expanded the aggregation rules so that the identification of covered employees and the calculation of compensation is made on a controlled group basis. A controlled group for this purpose can include entities other than corporations, such as partnerships. Taxpayers must aggregate entities to determine the “top five” highest-compensated employees (expanding to include additional employees for tax years beginning after 2026). Employers should implement enhanced tracking and reporting across all entities in controlled groups.
IRC Section 4960 Excise Tax on Tax-Exempt Organizations Paying Over $1 Million/Year: The covered employee group now includes all employees and former employees (employed in tax years beginning after 2016) with compensation exceeding $1 million without limit. In light of this expansion, employers should review executive compensation and plan for excise tax exposure.
Action Steps for Employers
The OBBBA represents a sea change in the field of payroll and employee benefits. Because many of the changes enter into effect after 2025, employers have an opportunity to prepare for these changes by implementing these steps:
- Update Payroll Systems
- Prepare for new reporting fields and withholding tables for 2026.
- Track “qualified tips” and “qualified overtime compensation” separately.
- Review Benefit Plans
- Amend plan documents for new limits and eligibility rules.
- Communicate changes to employees.
- Vendor/Contractor Payments
- Adjust processes for higher Form 1099 thresholds.
- Executive Compensation
- Aggregate compensation across entities for Section 162(m) and Section 4960 compliance.
- Consider New Benefits
- Evaluate offering Trump accounts and expanded child/dependent care benefits.
- Stay Informed
- Monitor IRS guidance and BDO updates for further details and implementation requirements.
How BDO Can Help
BDO’s Global Employer Services (GES) Employment Tax Services team is available to assist with:
- Payroll system updates
- Tax reporting compliance
- Benefit plan amendments
- Executive compensation and excise tax planning
Please visit BDO’s Global Employer Services page for more information on how BDO can help.