The One Big Beautiful Bill Act (OBBBA), also known as H.R. 1, is a federal reconciliation law signed on July 4, 2025. It combines tax policy and federal spending changes into a single piece of legislation.

The law builds on prior tax reforms, including many provisions from the 2017 Tax Cuts and Jobs Act, while introducing new, mostly temporary tax deductions and updates that affect both individuals and businesses. Some provisions apply from 2025 through 2028, while others take effect on different timelines, with some changes retroactive to Jan. 1, 2025.

While much of the law focuses on how taxpayers calculate income and claim tax benefits, it also has practical implications for employers. These include how earnings are tracked in payroll, how benefits are structured and how organizations prepare for evolving reporting and compliance requirements.

Key Provisions Employers Should Know

OBBBA covers a lot of ground. You don’t need every detail, but a few areas are more likely to show up in day-to-day work.

Key areas include:

• New tax deductions for tip income and overtime pay

• Updates to business tax treatment, including bonus depreciation and other business-related tax changes

• Expansion of employer tax credits, such as paid family and medical leave and employer-provided child care

• Increased contribution limits for dependent care flexible spending accounts (FSAs)

• Expanded flexibility for high-deductible health plans (HDHPs) and health savings accounts (HSAs)

• Changes to certain information reporting thresholds and reporting rules

• Increased immigration-related enforcement, fees and penalties

Some of these updates extend beyond payroll and into benefits and workforce planning.

The law expands several employer-related tax credits and benefit options, including those tied to healthcare, dependent care and employee well-being. Expanded tax credits, such as those for paid leave or child care, may make it easier for small businesses and tax-exempt organizations, such as nonprofits, to offer benefits that were previously harder to support.

New Deductions for Tips and Overtime

One of the most visible changes under OBBBA is the introduction of deductions for tip income and overtime pay.

Here’s how the deductions work:

• Up to $25,000 in qualified tip income can be deducted annually

• Up to $12,500 in qualified overtime pay can be deducted, or $25,000 for joint filers

• Deductions begin to phase out at $150,000 for individuals and $300,000 for joint filers

• Both provisions are temporary and currently expire on Dec. 31, 2028

These deductions reduce adjusted gross income (AGI), which can affect both taxable income and eligibility for certain tax credits and income-based programs. This may affect eligibility for some income-based programs and tax benefits. That may include programs tied to healthcare coverage, Medicaid, food assistance programs such as SNAP, or other benefits that support low-income individuals and beneficiaries.

Employees claim these deductions when they file their tax return, either alongside the standard deduction or when they choose to itemize.

It’s also important to note that this does not change how payroll taxes are calculated. Tips and overtime are still subject to Social Security and Medicare. The difference shows up when employees file their federal income taxes, not in how wages are taxed during payroll.

Ongoing Reporting and Compliance

Although these deductions apply to individuals, they rely on payroll data being accurate and clearly categorized. This creates several considerations for HR and payroll teams:

• Earnings classification: Overtime premiums and tip income may need to be tracked separately from base wages to help employees identify qualifying amounts.

• Year-to-date tracking: Employees with variable pay may rely on payroll records across multiple pay periods to calculate deductions and confirm eligibility for tax credits or other benefits.

• Transition year context: For tax year 2025, the Internal Revenue Service (IRS) kept Form W-2, existing Forms 1099 and Form 941 unchanged, and federal income tax withholding tables also remained unchanged. Employers were directed to continue using existing reporting and withholding procedures.

• Future reporting changes: For tax year 2026, the IRS has indicated that reporting requirements and forms will be updated to separately identify qualified tip income and overtime premiums. That means employers may need to plan for more detailed earnings tracking and clearer year-end reporting moving forward.

As these changes roll out, employees will likely have more questions about how their earnings are reported and what that means for their taxes and benefits.

What Employers Can Do Now

Because many provisions are still evolving, employers may focus on preparation rather than immediate changes. Steps to consider include:

• Monitoring IRS guidance as additional details are released

• Reviewing payroll systems to confirm that tip income and overtime premiums can be tracked clearly

• Preparing for potential reporting changes for the upcoming tax year

• Evaluating benefit programs in light of updated tax credits and contribution limits

• Updating plan documents for FSAs, HSAs or leave programs as needed

• Reviewing compliance processes, including I-9 documentation and recordkeeping

• Communicating clearly with employees about how earnings and benefits may be affected

Taking these steps now can help employers stay organized, respond to employee questions with confidence and adapt as guidance continues to evolve.