Payroll Implications with The One Big Beautiful Bill Act

On July 4, 2025, President Trump signed the One, Big, Beautiful Bill Act (OBBBA) into law, delivering on key promises from his 2024 presidential campaign. The legislation extends several provisions from the Tax Cuts and Jobs Act (TCJA) and introduces new measures with wide-ranging implications. Notably, the OBBBA includes significant updates affecting employers, particularly in the areas of payroll, employment taxes and employee benefits. Some of these changes apply retroactively to Jan. 1, 2025. In the coming weeks, the Department of the Treasury and the IRS are expected to release guidance to clarify how specific provisions will be implemented. 

Here’s how the OBBBA may impact payment management within your organization:  

Income and Employment Tax Impacts

• TCJA’s individual tax rates. Permanently codifies the federal tax rates and standard deduction amounts that have been in place since Jan. 1, 2018, following the enactment of the TCJA. For the 2025 tax year, the standard deduction will increase and continue to adjust annually for inflation. Additionally, the OBBBA introduces a temporary deduction of $6,000 per year, available through 2028, for taxpayers aged 65 and older. 

• Federal deduction for state and local taxes (SALT cap). Temporarily raises the federal cap on the SALT deduction from $10,000 to $40,000 starting in 2025, with inflation adjustments through 2029. The cap reverts to $10,000 in 2030. 

• Qualified overtime and qualified tips deductible from federal income tax. Introduces a federal income tax deduction for both qualified overtime and qualified tips, effective from tax years 2025 through 2028. These deductions are available to all eligible taxpayers, regardless of whether they itemize deductions or claim the standard deduction. However, the benefit begins to phase out once a taxpayer’s modified adjusted gross income (MAGI) exceeds $150,000, or $300,000 for those married filing jointly. It’s important to note, this deduction applies only to federal income taxes; individuals and employers must still withhold and pay applicable Medicare and Social Security taxes on qualified tips and overtime earnings. 

• Qualified overtime eligible for deduction. “Qualified overtime” refers to compensation that must be paid under Section 7 of the Fair Labor Standards Act (FLSA). To be eligible for the deduction, overtime must meet FLSA requirements and is capped at $12,500 per individual, or $25,000 for married couples filing jointly. Notably, only the premium portion of FLSA-mandated overtime is deductible, and any overtime not required under the FLSA does not qualify. 

• Qualified tips eligible for deduction. The deduction for “qualified tips” is capped at $25,000 per individual and applies only to cash tips received in occupations that customarily and regularly received tips as of Dec. 31, 2024. The OBBBA defines “cash tips” to include both direct cash payments and charged tips, as well as tips received through tip-sharing arrangements. Within 90 days of the OBBBA’s enactment, the Treasury Secretary is required to publish a list of qualifying occupations. Workers in certain specified industries are excluded from eligibility for the deduction. 

• Retroactive application and 2025 transition rule. Both the overtime and tip deductions are retroactively effective as of Jan. 1, 2025. To ease implementation, the OBBBA includes a transition rule allowing employers to estimate qualified overtime and tips for 2025 using “any reasonable method” approved by the Treasury Secretary. The Treasury Department is expected to issue guidance outlining acceptable estimation methods for the retroactive period, along with updates to tax forms, instructions and procedures for applying the deductions in future tax years through 2028. 

Employee Benefits Updates

• Enhancement of employer-provided childcare credit. Permanently expands the employer-provided childcare tax credit, increasing the maximum credit from $150,000 to $500,000 and raising the reimbursement rate from 25% to 40% of qualified expenses. To claim the full credit, businesses must spend at least $1.25 million on eligible childcare services. Small businesses, those with average gross receipts of $25 million or less over the prior five years, can claim up to $600,000 at a 50% rate, requiring $1.2 million in spending. The OBBBA also allows small businesses to pool resources or use third-party intermediaries to provide childcare for employees. 

• Paid family and medical leave tax credit. Makes the federal paid family and medical leave employer tax credit permanent, while also lowering the employee tenure requirement to six months to broaden eligibility. It also clarifies that state and local paid leave mandates count toward eligibility without reducing the credit amount. Additionally, employers can now claim the credit for premiums paid on qualifying paid leave insurance policies. 

• Business meals deductions. Maintains the current exemptions from the 50% deduction limitation, thereby preserving, and in some cases increasing, the amount eligible to be deducted. 

• Qualified transportation fringe benefits. Permanently eliminates the $20 per month qualified bicycle commuting reimbursement benefit. 

• Qualified moving expenses reimbursements. Removes both the exclusion for qualified moving expenses reimbursement and the deduction for moving expenses, except for active-duty members of the Armed Forces and members of the U.S. Intelligence Community. 

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