Overview

On July 3, 2025, Congress passed the One Big Beautiful Bill Act (OBBB), and on July 4, 2025, the OBBB was signed into law. The OBBB extends many provisions of the 2017 Tax Cuts and Jobs Act (TCJA) and affects a number of tax provisions related to compensation and employee benefits. Below, we provide a discussion of the key provisions employers should be aware of that may impact tax treatment at the entity-level or affect compensation paid to employees.

Updated: On August 7, 2025, the IRS announced that it will not modify the Form W-2, Form 1099, or Form 941 for the 2025 tax year, nor will the IRS update federal income tax withholding tables to account for the OBBBA. As part of this announcement, the IRS stated that employers should continue to use their current procedures for reporting and withholding for the 2025 tax year.
 

Key Compensation Provisions

Paid Family and Medical Leave Credit

Existing Law:
The TCJA created a temporary tax credit under Internal Revenue Code (Code) Section 45S for those employers who provide paid Family and Medical Leave Act leave, ranging from 12.5% to 25% of the wages paid to the qualifying employee. The credit is not available for policies required for state or local law compliance, nor is the credit available for policies that distinguish between part-time and full-time employees.

OBBB Provision:
The OBBB extends this credit indefinitely and allows employers to claim the applicable percentage of either wages paid, or insurance premiums incurred by the employer during the eligible leave period. Employers only need to consider an employee as eligible if that employee customarily works 20 hours per week.

In addition, the new provision says that policies required under state or local law will no longer affect an employer’s eligibility for the credit; however, payments provided to employees under policies required by state or local law will be included as part of the credit calculation.

Finally, the OBBB includes an aggregation rule that requires all employers in the same control group (as defined under Code rules) to comply with the credit’s requirements to be eligible.

Insight:
The onerous requirements and temporary nature of the credit have made many employers hesitant to amend their policies for purposes of taking advantage of this credit. Now that the credit is permanent, however, employers may want to reconsider whether they would like to adjust their policies to receive the credit. In addition, those employers with policies required under state law may now be eligible for this credit moving forward.
 

Employee Tax Deductions for Overtime

Existing Law:
Under current law, pay for overtime is included as taxable income and is subject to federal income and employment taxes. Employers are responsible for the withholdings associated with employee overtime just as they are with other income.

OBBB Provision:
The OBBB creates an above-the-line deduction for “qualified overtime” paid to certain employees. The deduction is equal to the qualified overtime for the applicable tax year up to $12,500 for a single filer and $25,000 for joint filers.

“Qualified overtime” includes overtime paid beyond the regular rate of pay in compliance with Section 7 of the Fair Labor Standards Act. Tips as well as payments made to highly compensated employees do not qualify.

Overtime deductions under the OBBB are only available for tax years 2025 through 2028.

Insight:
For the 2025 tax year, employers are instructed to approximate the amount of qualified overtime paid to an employee using any “reasonable method prescribed by the Secretary.” The Secretary has not yet provided guidance on such methods, and IRS guidance indicates that employers should continue to follow their regular reporting and withholding procedures. For tax years 2026 through 2028, employers will need to separately report qualified overtime compensation on employee W-2s and contractor 1099s. Employers should contact their payroll providers to begin putting processes in place for separately tracking qualified overtime if they do not already do so.
 

Employee Tax Deductions for Tips

Existing Law:
Under current law, tips are included as taxable income subject to federal income and employment tax. Employers are generally responsible for the withholdings associated with employee tips just as they are with other income. Employers are also responsible for complying with tax reporting requirements on tips.

OBBB Provision:
The OBBB provides an income tax deduction to individuals for qualified tips received over the course of the tax year. The deduction is capped at $25,000 annually and phases out when a taxpayer’s modified adjusted gross income exceeds $150,000 for single filers and $300,000 for joint filers.

“Qualified tips” include any voluntary, non-negotiated cash tip received for services provided in a job where tips are traditional and customary as of December 31, 2024.

Tip deductions under the OBBB are only available for tax years 2025 through 2028.

Insight:
Much like the OBBBA provision addressing deductions for overtime, employers are to approximate the amount of qualified tips earned for tax year 2025 by “any reasonable method specified by the Secretary.” The Secretary has not provided guidance on this point as of the date of this writing. IRS guidance states that employers should follow their typical reporting and withholding procedures for tax year 2025. In tax years 2026 through 2028 employers will need to separately report qualified tips on IRS Form W-2. The same goes for non-employees receiving qualifying tips, such as those contractors reporting income on IRS Form 1099. Employers should connect with their payroll provider to put processes in place to separately track qualified tips for the upcoming tax years.

The Secretary is tasked with developing a list of occupations where tips are “traditionally and customarily” received, and until the Secretary does so, employers will be responsible for making this determination independently, using any “reasonable method.”
 

Provisions Impacting Highly Compensated Individuals

Expansion of Excise Tax to Highly Compensated Employees in Tax-Exempt Organizations

Existing Law:
Code Section 4960 imposes an excise tax equal to the corporate rate (currently, 21%) on applicable tax-exempt organizations that pay excess remuneration or excess parachute payments to “covered employees.” Covered employees are the five highest compensated employees in the applicable tax year, as well as anyone who qualified as a covered employee in a prior year. The tax applies to compensation in excess of $1 million and excess parachute payments, as defined under applicable law.

OBBB Provision:
The OBBB expands the group of “covered employees” for the purposes of Code Section 4960. Under the new law, which is effective for tax years beginning after December 31, 2025, any employee of an applicable tax-exempt organization earning over $1 million is covered by the excise tax.

Insight:
This provision is likely to impact large tax-exempt organizations, such as private universities and hospitals, mostly, as those organizations are most likely to have more than five individuals paid beyond the $1 million annual threshold. Such organizations should ensure that each individual making over $1 million is accounted for and that the organization is prepared for the associated tax increase.
 

Extension of Increased Alternative Minimum Tax

Existing Law:
Alternative minimum tax (AMT) income is currently taxed at 26% for the first $239,100 and 28% for any income over this amount. AMT exemption amounts are $88,100 for single filers and $137,000 for married couples filing jointly. These amounts begin to phase out if income is over $626,350 for single filers or $1,252,700 for joint filers.

OBBB Provision:
The OBBB makes these amounts permanent and reverts the phaseout thresholds to the 2018 amounts of $500,000 for individuals and $1,000,000 for joint filers. Exemption phaseout rates increase from 25% to 50%. These revisions are effective for tax years beginning after December 31, 2025.

Insight:
Paired with the SALT limitation (now at $40,000 annually), the AMT regularly affects high-wage earners who live in states with higher tax rates. While employers are not directly impacted by this change in tax law, they should be aware of its potential impact on certain employees. In addition, for employers who offer tax-qualified Incentive Stock Options (ISOs) as part of their compensation program to employees, such employers should make sure to remind employees of the potential AMT impact on the exercise of such stock options. For employees who are at or near the necessary thresholds to pay AMT, an exercise of such stock options is treated as a taxable item for AMT purposes, even though it is not subject to regular income taxes and withholding at the time of exercise.
 

Excessive Employee Remuneration from Controlled Group Members

Existing Law:
Code Section 162(m) limits annual deductions for compensation paid to “covered employees” of publicly traded corporations. “Covered employees” of a corporation include the Principal Executive Officer, Principal Financial Officer, the next three highest paid individuals of that tax year, and anyone who qualified as a covered employee in a prior year. The annual deduction limit for such persons is $1 million. In 2027, Code Section 162(m) will expand the group of “covered employees” to include the next five highest paid individuals in a given year. For companies with highly compensated executives that receive pay at the parent company and/or related entities, affiliated group rules and deduction limitation allocation rules were set forth in regulations.

OBBB Provision:
The OBBB expands the potential coverage of Section 162(m) by stating that any payment provided to an employee from any member of a publicly held corporation’s “controlled group” is aggregated when applying the $1 million deduction threshold. The controlled group is determined using the standards set forth in Code Section 414. When a “covered employee” receives compensation from multiple entities in the controlled group, the amount of deductible compensation is allocated to each entity based on the proportion of the compensation each entity has paid.

Insight:
Publicly traded corporations will need to reevaluate their Section 162(m) deduction limitations if they have highly compensated employees working for related entities that may receive more than $1 million in compensation annually in the aggregate from all such entities, especially for 2027 and later when the number of employees subject to the deduction limitation is scheduled to increase. The OBBB provision applies the aggregation analysis to a broader group of entities than were previously captured under prior regulations and the Proposed Regulations issued earlier this year, which were intended to apply for tax years beginning in 2027.
 

Employee Benefits Provisions

• Expansion of Health Savings Accounts (HSAs): The OBBB has made HSAs more widely available by expanding the definition of high-deductible health plans (HDHP) to include bronze plans and catastrophic plans. In addition, there is a permanent safe harbor which states that first dollar telehealth coverage will no longer preclude a plan from being a HDHP. Finally, Direct Primary Care arrangements (those in which an individual pays a fixed price for medical care that only consists of certain primary care services, excluding certain lab services, procedures, and prescriptions) are not excluded from HDHP status.
   
• Dependent Care Assistance Program: The maximum exclusion for dependent care assistance under Code Section 129 is increased in the OBBB from $5,000 to $7,500 beginning in 2026.
   
• Employer Provided Childcare Credit: The OBBB has increased the nonrefundable tax credit available under Code Section 45F for employer-provided childcare. The maximum credit is raised to $500,000 and the percentage of qualified childcare expenses covered is increased to 40%. The OBBB also creates a small business (meets the gross receipts test of no more than $25 million based on the preceding five-year period) credit in which the maximum is $600,000 and the percentage of qualified childcare expenses is 50%. These limits are subject to cost-of-living adjustments in future years.
   
• Trump Accounts: Under the OBBB, parents will soon be able to open a new form of government-funded investment account on behalf of their children. U.S. citizens born between January 1, 2025, and December 31, 2028, are eligible to receive a one-time $1,000 deposit from the U.S. Treasury in such accounts. In addition, parents may contribute up to $5,000 a year per account and employers are permitted to contribute up to $2,500 per dependent (which counts toward each account’s $5,000 cap). Employer contributions are generally tax-free because the contribution is excludable from the employee’s gross income. These limits are subject to cost-of-living adjustments in future years.
   
• Extension of Educational Assistance Programs as Applied to Student Loans: Code Section 127 provides income exclusion up to $5,250 annually for certain educational assistance provided by employers. The OBBB makes the exclusion as applied to student loans permanent, which was otherwise set to expire at the end of the year.
   
• Business Meals: The TCJA eliminated the deductions available to employers for meals provided for the employer’s convenience near their premises; however, the OBBB provides exceptions to the rule, including for entertainment sold to customers (i.e., goods or services sold in a bona fide transaction).
   
• Elimination of Bicycle Commuting Reimbursements: The OBBB terminates the exclusion from income reimbursements for bicycle commuting after this year as well as the related employer deduction.
   
• Elimination of Exclusion for Moving Expense Reimbursements: The TCJA removed the qualifying moving expense reimbursement, except as applied to members of the U.S. Armed Forces, and the OBBB makes that modification permanent.

Insight:
Employers should review and consider the impact of these changes on their current employee benefit offerings and update plan documentation, employee communications, and payroll practices accordingly.