What the One Big Beautiful Bill Means for Employers and Payroll Teams 

Written By Strongpoint Partners

Strongpay’s guide to simplifying compliance and preparing for what’s next. 

The recently passed One Big Beautiful Bill Act (OBBBA) brings significant changes to the federal tax code, many of which directly affect employers, HR professionals, and payroll providers. While most headlines have focused on the tax relief available to individual taxpayers, several provisions in the bill require payroll teams and HR leaders to act quickly and precisely. 

At Strongpay, we believe in empowering employers with timely, actionable insights. Below, we break down the key updates that matter for your payroll operation and what steps you should take now to stay ahead of the curve. 

1. Deductible Overtime and Tip Income 

Beginning in 2025, employees can deduct up to $12,500 ($25,000 for joint filers) of qualified overtime compensation from their federal taxable income. However, this applies only to the premium portion of overtime required under Section 7 of the Fair Labor Standards Act (FLSA Overtime Pay)—the 0.5x in “time-and-a-half” pay—and not to state-mandated or collectively bargained overtime. The deduction phases out by $100 for every $1,000 over $150,000 in adjusted gross income ($300,000 for joint filers).

Qualified Overtime Income:

  • Must be FLSA-mandated overtime (over 40 hours/week)

  • Only includes the premium amount (not base wages)

  • Tips are not included

Qualified Tips Deduction

Employees may also deduct up to $25,000 of qualified cash tips annually. These must be:

  • Paid voluntarily (not mandatory or negotiated)

  • Received in occupations that customarily and regularly received tips before Dec. 31, 2024

  • Earned outside of Specified Service Trade or Businesses (e.g., law, medicine, arts)

The IRS will publish an official list of qualifying occupations by October 2, 2025. Mandatory service charges and automatic gratuities do not qualify.

Retroactive and Transitional Guidance

  • Both deductions are retroactive to January 1, 2025 and expire after December 31, 2028

  • For 2025 only, employers may approximate qualified overtime and tip amounts using a reasonable method

  • The IRS will release updated W-4 tables in 2026 to support new deduction calculations

New Employer Reporting Requirements

  • W-2 forms must include total qualified overtime in a new Box 19

  • 1099 forms (NEC and K) must separately report qualified overtime and tips for non-employees

  • Tips must also be reported on appropriate IRS forms (e.g., Form 4137), and employers will need to adapt to evolving IRS guidance

What Employers Should Do Now

  • Continue standard income tax withholding; employees claim deductions on personal returns

  • Start separating premium overtime pay from regular pay and track cash tips accurately

  • Prepare for IRS form changes and anticipated W-4 updates

  • Review payroll configuration to ensure readiness for Box 19 and future form revisions

FICA Tip Credit Expansion

Employers in beauty-related industries—barbering, hair care, esthetics, nail care, and spa services—can now claim the FICA tip credit, previously limited to food and beverage services.

 

2. Permanent Tax Credit for Paid Family and Medical Leave 

The OBBBA makes permanent the Tax Cut and Jobs Act's (TCJA) tax credit for employers offering paid FMLA leave. It now allows state- and local-mandated leave to count toward eligibility, but credits are only claimable for the portion of leave exceeding those mandates. Eligibility requires:

  • 6 months of employment (down from 1 year).

  • Written leave policy covering at least 2 weeks for full-time employees.

  • Employee earnings below 60% of the Highly Compensated Employee (HCE) threshold.

Employers may also claim a credit for paid insurance premiums for qualifying leave. 

3. Expanded Dependent Care and Fringe Benefits

Starting in 2026:

  • Dependent Care FSA contribution limits increase to $7,500 per year ($3,750 for Married Filing Separately) .

  • Qualified transportation fringe benefits and bike commuting exclusions are permanently restored.

  • Meals and facility deductions remain at 50%, with new 100% deductions for meals provided on certain fishing vessels and processors after December 31, 2025.

  • Moving expense exclusions are permanently eliminated (except for Armed Forces and intelligence community members).

 

4.Flexibility for HSAs, FSAs and TRUMP Accounts

OBBBA also introduces more flexibility in Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs), including broader eligibility and easier transitions for unused funds. While these changes phase in gradually, most will be effective starting in 2026. The Act introduces new tax-advantaged "TRUMP" accounts (Tax-Refundable Universal Match Plans), aimed at encouraging middle-income savings through payroll deductions.

 HSA/HDHP Changes (2026):

  • Expanded HSA eligibility for those with specific ACA plans.

  • HDHPs may cover telehealth pre-deductible without losing HSA eligibility.

TRUMP Accounts:

  • New retirement-like accounts for children born between 2025–2028.

  • $1,000 federal deposit at birth; $5,000 annual parental contribution limit; $2,500 employer contribution allowed.

  • Employer contributions are excluded from income.

 

5. Student Loan + Retirement Plan Integration 

OBBBA makes permanent the CARES Act provision allowing employers to treat student loan repayment benefits as qualified educational assistance. This benefit remains capped at $5,250 annually (to be indexed in $50 increments starting 2026) and can be used to match contributions into retirement plans.

Employers should:

  • Coordinate repayment plans with retirement matches.

  • Update benefit administration platforms accordingly.

 

6.Changes to 1099 Thresholds and Reporting

  • Form 1099-MISC and 1099-NEC: Threshold increased from $600 to $2,000 starting 2026, indexed for inflation starting 2027.

  • Form 1099-K: Thresholds revert to $20,000 and 200 transactions (undoing ARPA change).

These changes simplify reporting and reduce unnecessary filings for employers and platforms.

7.Employer-Provided Child Care Credit

  • Tax credit increased from 25% to 40% (50% for small businesses under $25M in gross receipts; $31M in 2025).

  • Annual limit raised to $500,000 ($600,000 for eligible small businesses), adjusted for inflation post-2026.

  • Businesses can partner or outsource childcare to qualify.

 

8.Employee Retention Credit (ERC) Revisions

  • No new ERC or refund claims accepted after January 31, 2024.

  • Statute of limitations extended to 6 years for Q3 and Q4 2021 claims.

  • New penalties apply to ERC promoters (excluding Certified Professional Employer Organizations).

Employers must ensure any prior ERC filings are well-documented and compliant to avoid recapture.

Preparing for What’s Ahead 

While these changes offer benefits to employees and employers alike, they also create new compliance risks for companies that are unprepared. Payroll and HR teams should work closely with benefits providers, finance leaders, and legal advisors to ensure their systems and policies are ready. 

Strongpay is actively preparing for these changes, so our clients can focus on running their businesses. We’re updating our payroll configurations, advising on compliance, and communicating updates to ensure your team is supported every step of the way. As we prepare, we eagerly await further directions from the IRS.

For the full detail of the bill, please refer here:  https://www.congress.gov/bill/119th-congress/house-bill/1/text

To learn how Strongpay can help you navigate these updates with confidence, visit strongpay.com. 

Strongpoint Partners