The One Big Beautiful Bill (OBBB): What Employers Need to Know
- Regina Dyerly, SHRBP, PHR
- 7 hours ago
- 4 min read
The One Big Beautiful Bill (OBBB): What Employers Need to Know
By: Regina Dyerly, SHRBP, PHR | Partner / Chief Operating Officer (COO)
The One Big Beautiful Bill (OBBB), was signed into law on July 4, 2025. It introduces sweeping changes to payroll, benefits, and workforce management. Two of its most notable provisions, “No Tax on Tips” and “No Tax on Overtime”, take effect for wages paid in 2025 and are set to expire after 2028, giving employers a limited window to adapt.
Note: The OBBB also includes broader federal tax updates, such as changes to standard deductions, SALT caps, and elements of the 2017 Tax Cuts and Jobs Act. While these changes primarily impact individual taxpayers, Vida HR will continue to monitor any downstream effects on payroll processing and compliance.
Key Highlights for Employers
Tax-Free Tips & Overtime (Section: 70201 & 70202)
Employees can deduct up to $25,000 in qualified tips and $12,500 in FLSA-required overtime pay each year.
Only employees in occupations that customarily receive tips are eligible for the tip deduction, per IRS guidance.
Overtime deductions apply only to FLSA-required overtime, not state-only daily overtime or voluntary double-time.
Employees must retain documentation and claim the deduction when filing their federal taxes. Employers are not responsible for calculating the deduction amount.
New W-2 Reporting Requirements
Employers must track and report qualified tips and overtime separately on Form W-2.
Vida HR payroll clients can rest easy, our team will handle payroll setup, tracking, and reporting updates for you.
No changes to current payroll tax withholding are required right now. These are employee deductions claimed at tax filing.
Retroactive Tracking
These provisions are effective for all 2025 wages, meaning qualifying tips and overtime already paid this year must be tracked retroactively.
No reprocessing of past payroll is required right now. Vida HR will implement tracking for clients and manage any year‑end reporting needs.
Benefits and Tax Credits
OBBB expands eligibility for telehealth services under HSAs and FSAs, and increases some annual contribution and reimbursement limits.
Employers may claim new tax credits for offering paid family leave and on-site or subsidized childcare.
Vida HR will help you evaluate benefits eligibility and, if requested, provide reporting to support your CPA in capturing any applicable credits.
Additional Tax Credit Opportunities (Changes) Under OBBB
Beyond the payroll and benefits provisions, the OBBB also includes updates to several federal tax credits that may benefit employers:
Research & Development (R&D) Credit
Employers investing in new products, processes, or improvements may be eligible. Recent changes require research expenses to be amortized over several years (Section 174), impacting how deductions are timed.
FICA Tip Credit
Adjustments for industries where tipping is customary, allowing eligible employers to offset part of their FICA tax paid on employee-reported tips.
Employer-Paid Child Care Credit (Section: 70401)
Increased flexibility and potential credit amounts for providing or subsidizing childcare, helping offset the cost of family-friendly workplace benefits.
Health Savings Accounts and Direct Primary Care Arrangements
Beginning January 1, 2026, the OBBB expands HSA eligibility by allowing individuals to participate in qualifying Direct Primary Care (DPC) arrangements without disqualifying their HSA contributions.
To remain eligible, monthly DPC fees must not exceed $150 for individuals or $300 for families. These limits will be indexed annually for inflation after 2026. In addition, DPC membership fees that fall within these thresholds may now be reimbursed directly from an HSA, providing more flexibility for employees seeking value-based primary care options.
Additional Employer Provisions Effective January 1, 2026
Increased Tax-Free Dependent Care Assistance Limits (Sec 70404)
Starting in 2026, the annual tax-free limit on dependent care assistance benefits increases from $5,000 to $7,500 for individuals (and from $2,500 to $3,750 for married individuals filing separately). Employers offering dependent care flexible spending accounts (DCFSAs) or similar plans should update plan documents and communicate the new limits during open enrollment for 2026.
Updated 1099-NEC Thresholds for Independent Contractors
Also effective January 1, 2026, the reporting threshold for payments to independent contractors increases from $600 to $2,000. This applies to both Form 1099-NEC reporting and backup withholding requirements. Beginning in 2027, this threshold will be indexed annually for inflation. Employers should review contractor engagement processes and prepare for updates to year-end reporting systems.
Action Steps for Employers
Verify employee eligibility for the new deductions to prevent improper claims.
Review benefit offerings to identify opportunities for new tax credits.
Communicate with employees that this is a deduction they claim at tax time, not an immediate increase in take-home pay.
Avoid risky pay strategies; creative reclassification or “extra overtime” schemes can create compliance problems.
Why This Matters
The OBBB creates meaningful tax advantages for employees but also brings new tracking and reporting responsibilities for employers. These changes offer a unique opportunity to enhance your employee value proposition—tax-free tips and overtime, expanded benefit eligibility, and flexible primary care options can make a real impact on take-home value. Employers who communicate these advantages effectively may find a competitive edge in recruiting and retaining top talent.
As your payroll partner, Vida HR will manage the payroll and reporting requirements so you can focus on employee communication and benefits planning. We are also monitoring state and local conformity and will update impacted clients as guidance is released.
The One Big Beautiful Bill (OBBB): What Employers Need to Know