Earlier this month, President Trump signed into law the administration's principal domestic policy bill, H.R. 1, known as the One Big Beautiful Bill Act (OBBBA). The OBBBA is a wide-ranging law that covers everything from defense spending to taxes.
To ensure alignment with the OBBBA, FrankCrum is actively reviewing benefit programs and payroll and tax withholding systems to accommodate new requirements. Further guidance is expected from the Treasury Department in October. FrankCrum will be developing resources related to the OBBBA that will be shared with clients as they become available.
Tax professionals are busy going through how this will impact individual taxpayers. It can also offer some planning opportunities for a business – you can check with your tax professional on which tax planning strategies might work for you.
The following is an overview on the OBBBA impact:
No taxes on tips. The OBBBA provides above- and below-the-line deductions for up to $25,000 per tax year in tips on a worker's personal income tax return, Form 1040, effective for tips received in 2025 through 2028. Since the OBBBA does not exclude tips from the definition of wages subject to withholding, tips remain subject to employer withholding for income and Social Security and Medicare (FICA) tax and federal unemployment insurance (FUTA) taxes.
For employers, nothing changes except that they must report the tips on Form W-2 (before the OBBBA, only Social Security-taxable tips had to be reported on the W-2). Since the OBBBA was enacted midyear, employers can estimate tips on the 2025 Form W-2.
The Treasury Department will publish a comprehensive list of eligible tipped occupations in early October.
No taxes on federal overtime. Like the tax exclusion for tips, beginning in 2025 and ending in 2028, the OBBBA provides above- and below-the-line deductions on an employee's Form 1040 for up to $12,500 in federal overtime, and up to $25,000 for married employees who file joint returns. Overtime remains subject to income and FICA withholding and to FUTA taxes.
An employer must report any overtime on an employee's Form W-2 and may estimate it for 2025.
For 2025, the Act authorizes the reporting party to “approximate” the amount designated as qualified overtime compensation pursuant to a “reasonable method” to be specified by the Treasury Secretary.
New withholding tables? For both the tax exclusion for tips and overtime, the OBBBA instructs the IRS to modify the current withholding tables and procedures to account for these deductions, but what that means is not yet clear.
Health savings accounts. The Bill introduces several expansions to Health Savings Accounts (HSAs), offering employers and employees flexibility in how they use pre-tax health dollars.
Dependent care assistance. Effective for plan years starting on or after January 1, 2026, the maximum amount employees may exclude from taxable income for dependent care benefits per year increases from $5,000 a year to $7,500.
Educational assistance. The OBBBA makes permanent the provision of IRC Section 127 that allows an employer to pay back an employee's student loans on a tax-free basis up to $5,250 a year. Beginning in 2027, this limit will be inflation-adjusted.
Information reporting. Effective for payments made to independent contractors made in 2026, the amount triggering Form 1099-NEC reporting will increase to $2,000, from $600. This increase will also apply to Form 1099-MISC reporting and backup withholding. The $2,000 reporting threshold will be adjusted for inflation beginning in 2027.
Employee Retention Credit (ERC). The OBBBA imposes a cut-off date of January 31, 2024, for the IRS to process Forms 941-X on which the ERC is claimed for the third quarter of 2021. However, employers that filed Forms 941-X after January 31, 2024, but before the three-year statute of limitations expired on April 15, 2025, and received their credit can keep it. The law also increases the statute of limitations for the IRS to claw back credits.
TCJA's suspensions are permanently repealed. Starting with tax year 2026, the OBBBA makes permanent the Tax Cuts and Jobs Act of 2017's (TCJA's) suspension of miscellaneous itemized deductions (e.g., employer-provided meals) and the income tax exclusions for qualified bicycle commuting fringe benefits and employer reimbursement of employees' qualified moving expenses (except for members of the armed forces and certain members of the intelligence community).
PFML credit. The OBBBA makes permanent the paid family and medical leave (PFML) tax credit and allows it to be claimed for an applicable percentage of premiums paid for insurance policies that provide PFML for qualifying employees, effective starting with tax year 2026.