Payroll & Tax Implications of the One, Big, Beautiful Bill

On July 4, 2025, the "One Big Beautiful Bill Act" (OBBBA) was signed into law, enacting significant changes to federal tax and payroll regulations.

For small business owners and HR managers, understanding these updates is essential for maintaining compliance and managing payroll operations. This post summarizes the key provisions that will most directly impact employers.

New Deductions for Tips & Overtime

The OBBBA introduces temporary tax deductions for employees. Effective for taxable years starting after December 31, 2024, the law allows employees to deduct up to $25,000 annually in qualified tip income (Sec. 70201) and up to $12,500 in qualified overtime pay (Sec. 70202) from their taxable income.

A key aspect for employers to consider is that these are not exemptions from tax on a per-paycheck basis. They are deductions employees will take on their personal, year-end income tax returns. This means there is no change to how weekly payroll withholding is calculated for these pay types. The deductions apply only to federal income tax, not to FICA or state tax withholding. 

The direct responsibility for employers is a new reporting requirement. Employers will be required to separately report qualified tip and overtime amounts on employee Form W-2s. Payroll software will be updated to handle this new reporting requirement.

Enhancements to Employee Benefits

The OBBBA makes several employee benefit provisions permanent, which may impact employer benefit packages.

Student Loan Assistance

The exclusion from an employee's income for employer-paid student loan assistance (up to $5,250 per year) is now permanent and will be adjusted for inflation in the future (Sec. 70412). This is effective for taxable years starting after December 31, 2025.

Dependent Care Assistance

The annual exclusion for employer-provided dependent care assistance programs (DCAP) increases from $5,000 to $7,500 (Sec. 70404). This change is also effective for taxable years after December 31, 2025.

Paid Family Leave Credit

The tax credit for employers offering paid family and medical leave (Sec. 45S) has been made permanent. The credit is also expanded to include payments for insurance premiums (Sec. 70304).

These changes present an opportunity for employers to review their current benefit offerings.

Employee Retention Credit (ERC) Enforcement

The OBBBA contains a critical enforcement provision related to the COVID-era Employee Retention Credit. The law imposes new penalties for improper ERC claims and prohibits any new claims from being filed after January 31, 2024 (Sec. 70605). This enforcement provision took effect immediately upon the bill's signing on July 4, 2025. Businesses that have claimed the ERC should review their documentation and compliance with a tax advisor.

Summary for Employers

The "One Big Beautiful Bill Act" introduces many changes, but the primary impacts on day-to-day payroll operations are focused on future reporting.

• The new tip and overtime tax deductions for employees do not alter weekly withholding calculations but do require new W-2 reporting at year-end.

• Benefit programs like student loan assistance and dependent care have been permanently enhanced, offering new value to employees.

• Enforcement of past ERC claims has been strengthened, and the deadline for new claims has passed.

For specific guidance on how this new law affects your business, consult with your tax and legal advisors.