By: Kim Adamson
The One Big Beautiful Bill Act (OBBBA) was signed into law on July 4, 2025, and introduces significant changes for payroll, benefits, and tax reporting. Below are key changes affecting employers and tips to stay compliant and take advantage of new opportunities.
No Federal Tax on Tips and Overtime
- Employees can deduct up to $25,000 in tips or $12,500 (or $25,000 for joint filers) in overtime pay. Employees must choose between the two deductions (tips or overtime) and cannot deduct both!
- The IRS will define eligible occupations for tip deductions.
- Employers must accurately report tips and overtime on W-2 forms and update payroll systems to track eligible expenses.
Health Savings Account (HSA) Expansion
- High Deductible Health Plans (HDHPs) can now waive deductibles for telehealth services without affecting HAS eligibility.
- HSA funds can be used for Direct Primary Care (DPC) fees (up to $150/month for individuals, $300/month for families).
Dependent Care FSA Limit Increase
- New annual cap effective 2026: $7,500 (up from $5,000) for single/joint filers and $3,750 for married filing separately.
- Employers must update plan documents and pass non-discrimination testing.
CHOICE HRAs
- Employers can now offer CHOICE HRAs (health reimbursement accounts) through cafeteria plans, with small businesses eligible for a $100/month per employee tax credit (first year).
Student Loan Repayment Benefit
- $5,250/year in tax-free assistance is now permanent.
- Indexed for inflation starting in 2027.
Trump Accounts for Minors
- Employers may contribute up to $2,500/year tax-free to employees’ children’s accounts.
- Contributions must follow a written program (starting in 2026).
- IRS guidance is forthcoming; employers should monitor developments.
Expanded Tax Credits
- Tip credit now includes the beauty and spa industries.
- Childcare credit increased from $150,000 to $500,000/year, and the percentage of qualifying expenses covered increased from 25% to 40%. This significantly increases the tax benefit for companies that support employee childcare (i.e., on-site childcare programs or third-party childcare partnerships).
- Paid family leave credit made permanent and expanded. To qualify, employers must offer two or more weeks of paid leave to employees with six or more months of service and earning below 60% of the Highly Compensated Employee (HCE) limit. Credit: 12.5%–25%.
Increased ICE Enforcement
- Employers should audit Form I-9s and prepare for more inspections.
What Employers Should Do
Immediate:
- Update payroll systems to track tip and overtime income
- Review HDHP and HSA plan designs
- Amend the Dependent Care FSA and student loan repayment plans
- Conduct I-9 audits and compliance checks
By 2026:
- Start preparing now for the 2026 open enrollment season – Employees will need clear guidance on new benefits, especially around tip/overtime deductions and expanded FSAs.
- Launch employee education campaigns – Consider creating a detailed communication plan to ensure all employees understand the changes and how they may affect them.
- Update open enrollment materials
- Create Trump Account contribution programs
Ongoing:
- Consult legal and tax advisors for strategic planning
- Monitor IRS guidance and reporting requirements
- Claim eligible tax credits
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