Key Takeaways:
- New individual tax deductions for tips and overtime require payroll reporting changes.
- Several benefits and credits are made permanent, with new limits and compliance steps.
- Employers should begin planning now for 2026 implementation and communication
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What is the OBBBA and why does it matter to employers?
The One Big Beautiful Bill Act (OBBBA) introduces wide-ranging changes that affect how employers manage payroll reporting, benefits administration, and executive compensation. Most provisions apply beginning in 2025 or 2026, giving employers time to prepare systems and processes.
What is the “No Tax on Tips” provision?
From 2025 to 2028, employees may deduct up to $25,000 in qualified tips annually on their personal federal tax returns.
What employers need to know:
- Tips are still subject to federal withholding and benefit calculations.
- Applies only to occupations that customarily received tips before December 31, 2024 (as defined by IRS guidance).
- Phase-out starts at $150,000 AGI ($300,000 joint).
- For 2025, employers must estimate and report qualified tips from January 1 through July 3.
- Use Box 14 of Form W-2 or a separate statement to report this amount.
What is the “No Tax on Overtime” provision?
Employees may deduct up to $12,500 per year ($25,000 for joint filers) for federal FLSA overtime pay (the premium part only). This applies from 2025 to 2028.
Key considerations for employers:
- Applies only to overtime required by the FLSA, not state or local law.
- Employers should track FLSA overtime separately from other types.
- Box 14 and Box 12 of Form W-2 will include new codes for reporting.
What benefit-related provisions are now permanent?
The OBBBA makes several benefit-related rules permanent or enhanced:
- Student Loan Repayment Assistance: $5,250 tax-free annually under Section 127.
- Paid Family and Medical Leave Credit: Includes state-mandated paid leave and insurance premiums (from 2026).
- Child Care Credit: Increased to $500,000 ($600,000 for small businesses), covering 40 to 50 percent of eligible expenses.
- Dependent Care FSAs: Contribution limit increased to $7,500 (from 2026).
- Telehealth Coverage: First-dollar coverage under HDHPs is now permanent.
- Direct Primary Care: Payments using HSAs are now classified as medical expenses.
- Bicycle Commuting Reimbursement: Permanently repealed as a tax-free benefit.
How are 1099 thresholds changing?
For payments made after December 31, 2025:
- The threshold for Form 1099-NEC and Form 1099-MISC increases from $600 to $2,000.
- Indexed for inflation beginning in 2027.
- W-2 reporting thresholds are still unchanged.
Employers should:
- Review contractor payment processes.
- Update onboarding and vendor tracking systems for 2026.
What is the new “Trump Account” benefit?
The OBBBA introduces a new optional savings account for children under age 18 with Social Security numbers.
- Parents can contribute up to $5,000 annually (indexed).
- Employers may contribute up to $2,500 tax-free per year.
- No contributions are allowed before July 4, 2026.
- Employers offering this benefit must follow non-discrimination rules.
What changed with executive compensation rules?
Two key changes affect high earners and tax-exempt employers.
Section 162(m):
- Applies to controlled groups, including corporations, partnerships, and other entities.
- Compensation is needed from all entities.
- Applies for tax years starting after 2026.
Section 4960 (Excise Tax):
- Now applies to any current or former employee of tax-exempt entities with compensation over $1 million.
- Retroactive inclusion for employees employed after 2016.
Employers should:
- Reassess tracking of executive compensation across all entities.
- Prepare for expanded audit exposure and reporting complexity.
What should employers do now?
To prepare for the OBBBA’s upcoming changes, employers are encouraged to:
- Update payroll systems to track qualified tips, overtime, and new reporting codes.
- Amend benefit plans to reflect new limits and eligibility rules.
- Communicate clearly with employees about deductions and benefits.
- Review contractor and vendor payments for 2026 threshold compliance.
- Aggregate executive compensation across entities for 162(m) and 4960 purposes
- Monitor IRS guidance for ongoing updates and clarifications.
How Employers Can Prepare — and Where MGO Supports
The OBBBA introduces a wide range of payroll and benefit changes that will require thoughtful planning, updated systems, and cross-functional coordination. As employers assess how these provisions impact compensation strategy, tax reporting, and employee communications, it’s important to act early and build in flexibility for more regulatory guidance.
MGO’s team collaborates with employers to evaluate the operational impact of tax law changes and adjust payroll, benefits, and compensation structures accordingly. From reporting readiness to help plan updates and compliance tracking, we support finance and HR teams in aligning decisions with evolving requirements. Contact us to learn more.