On July 4, 2025, President Trump signed into law a bill entitled “An Act to provide for reconciliation pursuant to title II of H. Con. Res. 14,” generally referred to as the One Big Beautiful Bill Act (the OBBBA). The OBBBA will impact numerous workplace and employment requirements and opportunities. This Alert highlights some of the most significant areas impacted by the OBBBA.
Key Workplace- and Employment-Related Tax Provisions
No Tax on Certain Overtime and Tips
Among the oft-discussed provisions introduced by the OBBBA are the income tax deductions for overtime and tip compensation. These deductions are temporary, applying only to the 2025 through 2028 taxable years. See the IRS Fact Sheet, available at https://www.irs.gov/newsroom/one-big-beautiful-bill-act-tax-deductions-for-working-americans-and-seniors.
In the case of overtime, an employee may deduct up to $12,500 if he or she is a single filer, and up to $25,000 if he or she is a joint filer, with respect to federal income taxes. The deduction applies only to “qualified overtime,” which generally means overtime required under the federal Fair Labor Standards Act, serves to reduce gross income, and phases out (but not below $0) by $100 for every $1,000 by which the employee’s modified adjusted gross income (i.e., gross income with certain adjustments) exceeds either $150,000, if the employee is a single filer, or $300,000, if the employee is a joint filer.
In the case of tips, an employee may deduct up to $25,000. The deduction applies only to “qualified tips,” which generally means cash tips received by an individual in an occupation that customarily and regularly received tips on or before December 31, 2024. It also serves to reduce gross income and phases out (but not below $0) by $100 for every $1,000 by which the employee’s modified adjusted gross income exceeds either $150,000, if the employee is a single filer, or $300,000, if the employee is a joint filer.
Notably, both overtime pay and tips remain subject to existing payroll and state income tax requirements. Therefore, employers must be aware of both federal and state law when determining the appropriate deductions from employee wages, although the IRS is required to modify the procedures regarding wage withholding for taxable years beginning after December 31, 2025, to take into account these deductions. Further, employers must report qualified overtime as a separate line item on employees’ Form W-2s, and employers must report tip income and tip recipients’ jobs.
Reduced Reporting Threshold for Non-Employee Compensation
The threshold for reporting payments made by employers, in the course of their trade or business, after December 31, 2025, to independent contractors and other payees (such as, for example, legal counsel for plaintiff in an employment settlement agreement) increases to $2,000 from $600. Employers will have reduced reporting burdens but must update their accounting systems.
Changes and Impacts of New Benefits Provisions
The OBBBA ushers in multiple tax-related changes in employee benefits, many of which present opportunities for employers to improve benefit offerings, but some of which present potential challenges to employers.
Opportunity: Increased Contribution Limit for Dependent Care Flexible Spending Accounts
Beginning in taxable years following December 31, 2025, the OBBBA increases the contribution cap for dependent care flexible spending accounts (FSAs), which employees use to pay for childcare and related expenses (e.g., summer camp) for their children on a pre-tax basis. The cap is increased from $2,500 to $3,750 for an employee filing his or her federal income tax return separately from his or her spouse and from $5,000 to $7,500 for an employee filing his or her federal income tax return jointly with his or her spouse. Many employers will want to provide this enhancement to make it easier for their employees with children to pay for childcare and related expenses.
Opportunity: Permanency of Tax Credit for Paid Family Leave
The OBBBA makes permanent the federal income tax credit for employers offering paid family and medical leave (PFML), originally enacted under the 2017 Tax Cuts and Jobs Act. The credit, which now will extend past 2025, applies to wages paid during PFML-covered leave. The OBBBA also permits employers to receive the credit for PFML provided to employees who have been employed for at least six months, rather than the previously required 12 months. However, the OBBBA now requires employees to be customarily employed for at least 20 hours per week in order to qualify for the credit. The law also permits employers who are required by state or local law to provide paid family and medical leave to receive credit for paid leave provided above the state or locally required amounts. Additionally, employers now can choose between two methods for calculating paid family and medical leave credit:
- The first option is the same as the original method, by which employers may claim a credit calculated as a percentage of wages paid to qualified employees during leave periods.
- The second option allows employers to base a credit on a percentage of total premiums paid or incurred for insurance policies covering PFML. This option aims to reward employers for being proactive in providing leave coverage regardless of whether the coverage is used.
Opportunity: Pre-Deductible Telehealth Services
Increased flexibility is given to employers who offer – and employees who take advantage of – health savings accounts (HSAs) and high-deductible health plans (HDHPs). The OBBBA makes permanent, and retroactively effective to plan years beginning after December 31, 2024, the ability of employers to offer telehealth services under an HDHP without imposing a deductible for such services on their employees and eligible dependents.
Opportunity: Employee Participation in Direct Primary Care Arrangements
Effective for months beginning after December 31, 2025, employees are no longer disqualified from participating in an HDHP when they hold direct primary care arrangements (DPA) – i.e., arrangements under which employees are provided medical care consisting solely of primary care services provided by primary care practitioners, if the sole compensation for such services is a fixed periodic fee – with monthly membership fees not exceeding $150 ($300 if the DPA covers the employee and one or more dependents). Certain DPA fees are HSA-reimbursable, but the arrangements must solely consist of primary care services under a fixed periodic fee compensation arrangement, and coverage cannot include prescription drugs (other than vaccines), certain laboratory services, or procedures involving general anesthesia.
Opportunity: Permanency of Tax Exclusion for Employer Payment of Student Loans
For employers paying student loans on behalf of their employees, the up to $5,250 federal income tax exclusion for certain payments made under an educational assistance program is made permanent and, for taxable years beginning after 2026, is subject to an inflation adjustment. Employers must update their accounting systems accordingly.
Challenge: Expanded Class of Nonprofit Employees under Section 4960 21 Percent Excise Tax
Effective for taxable years beginning after December 31, 2025, the OBBBA expands the class of employees to whom annual payments exceeding $1 million or golden parachute payments would trigger the 21 percent excise tax payable by nonprofit organizations from the five highest-paid employees to all employees and former employees. Practically, the change requires more diligence on the part of employers, especially with respect to severance payments in connection with involuntary terminations of employment.
Challenge: Controlled Group Rules Apply to Section 162(m) Limitation on Deduction of Remuneration Payable by Public Companies Exceeding $1 Million
Effective for taxable years beginning after December 31, 2025, the $1 million cap on the annual deduction by a publicly traded company for compensation paid to a covered employee applies on a controlled group basis. Thus, compensation paid by affiliates of the public company counts toward the limit.
Challenge: Tax Exclusions for Bicycle Commuting and Moving Expenses Eliminated
Effective for tax years beginning after December 31, 2025, the OBBBA permanently eliminates certain incentivizing tax exclusions for bicycle commuting reimbursement and moving or relocation expenses, and employers must similarly update their accounting systems.
The OBBBA and Government Agencies
The OBBBA also increases the annual budget for Immigration and Customs Enforcement (ICE) from $9.13 billion to $170 billion. This means employers will likely see an increase in immigration enforcement activity, including more frequent and rigorous I-9 audits and enforcement actions. The bill also increases certain immigration fees. For more information on these fees, please see the USCIS alert, USCIS Updates Fees Based on H.R. 1.
The OBBBA also introduces a new short-term Workforce Pell Grant program. The grants are now available for programs lasting between 8 and 15 weeks and 150 and 599 hours of instruction. The United States Secretary of Education will help determine the eligibility of instruction programs, although in light of proposed cuts to the Department of Education (DOE) and recent interagency agreements between the DOE and Department of Labor (DOL) on other workforce development programs, the DOL likely will have some oversight duties of the Workforce Pell Grant program in the future.
Impact on Artificial Intelligence
On July 1, 2025, the Senate removed the artificial intelligence (AI) provision entirely from the federal budget bill in alignment with a recent executive order from the Trump administration, which framed AI dominance as necessary to promote “human flourishing, economic competitiveness, and national security.” The executive order also emphasized the removal of regulatory barriers to innovation.
The House version of the OBBBA initially included a 10-year moratorium on state-level laws regulating AI models and systems, and automated decision systems (ADS). In response, Senate leaders proposed a revised approach: allocating annual funds to support AI and ADS development at the state level, conditional on states “pausing” their regulatory efforts through the next decade. Negotiations ultimately led to a scaled-down proposal with a five-year pause, but in a near-unanimous vote, the Senate chose to remove the AI provision entirely from the OBBBA.
While this effort to stymie state AI regulation failed, efforts continue to temper local oversight. Attention now shifts to the states — especially states like Illinois and New York that have existing workplace AI laws — and others such as Texas, Colorado, California, and Connecticut, where regulation is brewing. As the regulatory landscape continues to evolve, employers should take proactive steps to mitigate risk and ensure responsible AI use in the following ways: (1) design compliance systems and policies with built-in flexibility, recognizing that this space will remain highly active and dynamic; (2) conduct regular audits of AI tools, both internally and through vendor partnerships; and (3) maintain meaningful human oversight in discretionary employment decisions.
The Bottom Line
Employers must be aware that the OBBBA will change (and, in some cases, has already changed) certain aspects of how they conduct business and lead employees. Certain tasks, like contacting accounting vendors to update systems and revising employee handbooks, should be undertaken immediately. Preparing for any agency investigations and devising AI policies must be given consideration. The OBBBA will affect employers in many ways, and forward-thinking will be the best way to ensure compliance.
