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Payroll and HR Impacts of the “One Big Beautiful Bill Act”
On July 4, 2025, President Trump signed into law HR 1, commonly known as the “One Big Beautiful Bill Act (OBBBA). This legislation includes a myriad of provisions that affect both businesses and individuals, including these items that will affect payroll and HR:
No Tax on Tips or Overtime?
While these provisions have been promoted as “no taxes,” that’s only true up to a point. First off, all tax withholding from an employee’s paycheck for earnings due to overtime pay or tips will continue without any change. The employee will then be responsible for reporting those designated amounts on their Form 1040 at the end of the year to receive a tax deduction for overtime earnings up to $12,500 (single filers)/$25,000 (joint filers).
Employees who receive tips can claim a tax deduction for qualified tips received during the year up to $25,000. The Department of Treasury has been directed to provide a list of occupations that customarily receive tips for purposes of this tip deduction.
Both of these deductions phase out by $100 for each $1,000 an employee earns above $150,000 per year ($300,000 for joint filers).
These provisions will require the IRS to modify Form W-2 to allow employers to report overtime and tips, beginning with 2025 forms due at the end of January 2026.
Increased Form 1099 Threshold
Up until now, businesses were required to file a Form 1099-MISC or 1099-NEC for payments above $600 to independent contractors and certain other businesses. This threshold has been increased to $2,000.
Increased Dependent Care FSA Contribution Limit
This one’s been a long time coming. The contribution limit for dependent care flexible spending accounts has been $5,000 for the past 40 years without any indexing for inflation. The OBBBA increases the contribution limit to $7,500 per year beginning in 2026 . . . still without any indexing for inflation. Hopefully, it won’t take another 40 years for this limit to catch up with the average cost of day care in the US, which is estimated to be more like $15,000.
If your company provides a dependent care flexible spending account benefit, look for updates from your FSA administrator with more guidance later this year.
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