The recently enacted One Big Beautiful Bill Act (the “Act”) introduces several significant amendments to the Internal Revenue Code (“IRC”) that directly affect U.S. employers and employees. Key provisions—particularly the elimination of federal income tax on certain tips and overtime pay—are summarized below. For a comprehensive analysis of the Act, please see Whiteford’s Client Alert.
  • Exclusion of Tips from Federal Taxable Income: Effective tax years 2025 through 2028, employees earning qualified tips in occupations listed by the IRS as customarily and regularly receiving tips on or before December 31, 2024, as part of their occupation (work), and reporting those tips, may receive a deduction on their income tax returns (IRC § 224). 
For purposes of this new deduction, a “qualified tip” is voluntary cash or charged tips received from customers or through tip sharing. Under this new tax provision, an individual may now deduct up to $25,000 of qualified tips per year (subject to phase-out for taxpayers with modified adjusted gross income over $150,000, and $300,000 for joint filers).
 
Employers and third-party payors must separately and accurately report qualified tips on W-2s and other informational (disclosure) returns, required by the IRS, such as on either Forms 1099-K, 1099-MISC, or 1099-NEC. This provision is retroactive to tax year 2025 and sunsets after 2028. The Treasury Department is expected to publish a list of eligible tipped occupations by October 2, 2025. The IRS and state and local governments are expected to provide further guidance on this provision. Deduction is available for both itemizing and non-itemizing taxpayers.
  • Exclusion of Overtime Pay from Federal Taxable Income: As noted in our recent Client Alert, employees may now deduct up to $12,500 of “qualified overtime” pay per year ($25,000 for joint filers), phased out at higher incomes, for tax years 2025 through 2028 (under IRC § 225). Qualifying overtime must be required under the federal Fair Labor Standards Act (paid at 1.5 times the employee’s regular pay after working 40 hours in a workweek). Overtime must be separately reported on W-2s and other informational returns. This provision is retroactive to 2025 and expires in 2028.
  • Increased Information Reporting Thresholds: The threshold for reporting nonemployee compensation on Forms 1099-MISC and 1099-NEC increases from $600 to $2,000, indexed for inflation (pursuant to IRC § 6041). Reporting is now based on the calendar year. This change is effective January 1, 2026, and applies to income earned thereafter.
  • Limitations on Deducting Excessive Employee Remuneration: The Act (under IRC § 162(m)) expands the deduction limitation for compensation exceeding $1,000,000 paid to a covered employee by members of a controlled group—that is, a parent controlling 80 percent of a subsidiary or brother-sister controlled groups with 50 percent voting power. The deduction is capped at $1,000,000, effective January 1, 2026.
  • Excess Compensation Excise Tax: The Act expands the application of the excise tax of 21% on excess compensation (per IRC § 4960). The tax previously applied to the top five highest-paid employees of a tax-exempt organization. The Act broadens its application, covering anyone earning $1 million or more.
  • Disallowance of Meal Expense Deductions (IRC § 274(o)), Moving Expense Deduction (IRC § 217), and Bicycle Commuting (IRC § 132(f)): Beginning January 1, 2026, employers may no longer deduct expenses for meals provided for the employer’s convenience or subsidized meals in on-site cafeterias. Additionally, the disallowance for moving expense deductions is permanent. Moving expenses continue to be taxable income to employees. The exclusion from employee income of $20/month bicycle commuting employer reimbursement has been permanently eliminated.
  • Employee Retention Credit Changes: The Act disallows COVID-related ERC claims not paid by the IRS as of the Act’s passage (pursuant to IRC § 3134), limiting eligible claims to those filed for the second half of 2021. False claims promotion involves marketing or advising on ERC claims in a manner that involves false statements about eligibility, the amount of credit, or other material aspects of the ERC, with the intent of causing taxpayers to submit improper or ineligible claims. The statute of limitations for claims is extended to April 15, 2028, and penalties are introduced for false claim promotion.
  • Permanent Paid Family and Medical Leave Credit: The Act makes the paid family and medical leave tax credit permanent, allowing covered employers to offset the costs of providing paid leave with tax credits.
  • Enhanced Employer-Provided Childcare Credit: The annual credit for employer-provided childcare permanently increases to $500,000 (up to 40% of qualified expenses), up from $150,000 (25% of qualified expenses) (under IRC § 45F). This applies to amounts paid after December 31, 2025.
  • Permanent Tax Exclusion for Student Loan Repayment Assistance: The Act makes the tax exclusion for employer-paid student loan contributions permanent (per IRC § 127), up to the $5,250 annual limit.
  • Potential for Increased Form I-9 Audits and Inspections: The Act has allocated substantial increased funding to the U.S. Immigration and Customs Enforcement (“ICE”), including resources for enforcement and deportation operations, and the expansion of detention capacity (specifically, nearly $30 billion for enforcement and deportation and $45 billion for expanding detention capacity). This may suggest an increase in worksite enforcement activities, including audits of Form I-9s, inspections and deportations. A Form I-9 audit typically starts when ICE serves an employer with a Notice of Inspection (“NOI”), requesting the production of I-9 forms and supporting documentation.
  • Dependent Care Assistance: The Act permanently increased the annual exclusion limit for dependent care assistance programs (“FSAs”) (pursuant to IRC § 129). Effective for tax years beginning after December 31, 2025, the maximum amount that an employee may exclude from gross income for employer-provided dependent care assistance is raised from $5,000 ($2,500 for married individuals filing separately) to $7,500 ($3,750 for married individuals filing separately). This increase allows working parents to set aside a greater pre-tax amount for qualified dependent care expenses, such as daycare, preschool, and after-school programs.
  • Implementation of Trump Accounts: The Act also introduced a new tax-advantaged account known as the “Trump Account” (under IRC § 530A).  These accounts are designed to encourage long-term savings for children under the age of 18. Annual contributions of up to $5,000 per child are permitted (adjusted for inflation after 2027), and for tax years 2025 through 2028, the federal government will make an additional $1,000 contribution for each newborn. Employers may contribute up to $2,500 per year per child, and such employer contributions are excluded from the employee’s gross income. Withdrawals are generally restricted until the child reaches age 18, and distributions are taxed similarly to traditional IRAs, with certain penalty exceptions for early withdrawals.
  • Health Savings Account Expansion: For health savings accounts (“HSAs”), the Act made several important changes to expand eligibility and flexibility (pursuant to IRC § 223). The Act expanded the qualifications under the ACA to add more high-deductible health plans for HSA purposes, effective for months beginning after December 31, 2025. It also clarified that direct primary care service arrangements, up to $150 per month for individuals or $300 per month for families, do not disqualify an individual from HSA eligibility. Additionally, the safe harbor for telehealth services was made permanent, permitting certain plans to cover telehealth. These provisions collectively broaden access to HSAs and increase the range of health care arrangements that are compatible with HSA participation.
What Employers Should Do Now
Employers should promptly review and update their payroll, reporting, and expense policies to ensure compliance with the Act’s new requirements. Employers will need to separately track overtime pay and tip pay in their payroll systems and prepare for changes to the W-2 forms. Additionally, for tax purposes, the reporting of tips, overtime, meal expenses, and 1099 reporting thresholds need to be closely monitored. Employers must remain mindful of State and local tax laws and regulations, which may or may not vary from the Act’s provisions.
 
Furthermore, special attention should also be given to review of Form I-9s with legal counsel to ensure compliance with immigration and labor laws.