On July 4, 2025, President Trump signed into law what’s already being called one of the most sweeping pieces of legislation in recent history: “The One Big Beautiful Bill Act” (OB3). True to its name, this bill is big, touching everything from tax policy and healthcare to labor law and business compliance.
Buried inside its hundreds of pages are several new and extended provisions that impact payroll-related areas, including wage calculations, tax withholdings, reporting and more. In this post, we highlight the top eight OB3 policies impacting payroll and HR professionals.
1. Deductions for qualified tips
As part of a new OB3 provision, qualifying individuals may claim an income tax deduction for tips received while working a qualified occupation during tax years 2025 through 2028.
“Qualified tips” are voluntary cash or charged tips received from customers or through tip sharing. In other words, the deduction applies to tips employees receive directly as cash or those shared among employees as part of their earnings.
Provision highlights:
- The maximum deduction amount is $25,000 per tax year.
- Excludes highly compensated employees by phasing out a deduction for single filers with an adjusted gross income (AGI) over $150,000 ($300,000 for joint filers). That said, employees with income too low to owe federal income tax may not qualify to benefit from this deduction, as it applies only to those with sufficient taxable income.
- If married, employees must file jointly to claim this deduction.
- Deductions are available to both itemizers and non-itemizers.
- The U.S. Treasury is required to publish a list of occupations that customarily and regularly received tips on or before December 31, 2024, by October 2, 2025.
Employers should continue withholding taxes from tip income as usual. This provision does not impact paycheck calculations. Instead, the benefit will be applied when an employee (or employee representative) files the annual federal tax returns.
2. Deductions for qualified overtime pay
Another new provision introduced by the OB3 allows individuals to claim an income tax deduction for qualified overtime compensation, specifically, overtime required by the federal Fair Labor Standards Act (FLSA) received during tax years 2025 through 2028.
Provision highlights:
- The deduction only applies to the premium portion of overtime pay for hours worked beyond 40 hours in a week. Therefore, if an employee makes $20 per hour and time-and-a-half (or $30) for overtime, they can only claim deductions on the additional $10 per hour earned for working overtime.
- The deduction only applies to the premium amount on hours beyond 40 hours per week, regardless of state or local laws or contracts, such as union contracts, that look at overtime differently.
- The annual deduction limit is $12,500 for individuals and $25,000 for joint filers.
- Overtime phases out for AGIs over $150,000 for single filers and $300,000 for married, joint filers.
Employers should continue withholding taxes as usual. Like with tips, this provision does not impact paycheck calculations, as the benefit is applied on the federal tax return.
IRS Update – August 7, 2025:
As part of its phased implementation of the OB3, the IRS has announced there will be no changes to certain information returns or federal income tax withholding tables for Tax Year 2025. This impacts the provisions outlined in Sections 1 and 2 of this blog.
Forms W-2, existing Forms 1099, Form 941 and other payroll return forms will remain unchanged for 2025. Employers and payroll providers should continue using current procedures for reporting and withholding.
These decisions aim to avoid disruptions during tax season and give businesses, tax professionals, and the IRS more time to prepare for 2026 changes. For more information visit, One Big Beautiful Bill Act of 2025 provisions.
3. Information reporting threshold for certain payees
Before the OB3, businesses were required to file Form 1099-NEC or 1099-MISC for most non-employee payments totaling $600 or more in a calendar year. Under the new law, the reporting threshold increases to $2,000 for payments made after Dec. 31, 2025.
This means employers will continue to report qualifying payments to contractors, landlords, attorneys and vendors the same way they always have. The only difference is that the threshold for when it’s required will increase.
4. Permanent individual income tax rates
The OB3 eliminates uncertainty surrounding individual tax rates by making the 2017 tax reform brackets permanent. This means payroll teams and employees can plan with greater confidence knowing rates won’t change unexpectedly in the near future.
Provision highlights:
- The individual income tax rates set by the 2017 tax reform are now permanent under OB3, which were to expire at the end of 2025.
- Provides stable withholding parameters for payroll processing.
- Your payroll provider will need to update the withholding tables in your payroll system to reflect the new rates. These tables are typically updated annually as changes are released.
There are no immediate changes to paycheck calculations, but this provides enhanced predictability for tax planning.
5. Saver's Credit expanded to ABLE accounts
With the OB3, the federal Saver's Credit has been expanded to include contributions to Achieving a Better Life Experience (ABLE) accounts, which are tax-favored savings accounts for individuals with disabilities. This extension promotes financial inclusion and rewards saving among more employees and their families.
Provision highlights:
- Contributions to ABLE accounts may now qualify for the federal Saver's Credit.
- Encourages employees and families to save for disability-related expenses with tax advantages.
- Enhances the reach of a federal tax credit beyond traditional retirement savings.
Employers should update benefit communication and education materials accordingly.
6. Simplified repayment plans for new borrowers (effective July 1, 2026)
The OB3 introduces major reforms to federal student loans effective July 1, 2026, aimed at reshaping borrowing limits, repayment options and borrower protections.
Provision highlights:
- Pausing the Biden Administration’s borrower defense and closed school discharge rules until 2035.
- Capping graduate student loans at $20,500 per year ($100,000 lifetime) and professional degree loans at $50,000 per year ($200,000 lifetime), while eliminating Graduate PLUS Loans for new borrowers.
- Establishing a lifetime borrowing limit of $257,500 for most federal student loans.
- Restructuring income-driven repayment programs with new standardized plans for future borrowers.
- Expanding Pell Grant eligibility to include workforce-training programs.
Impact: Borrowers taking out new federal student loans on or after July 1, 2026, will have fewer repayment plan options. They will choose between a standard repayment plan and the new Repayment Assistance Plan (RAP).
HR Implications: While this primarily impacts borrowers, HR teams may want to be aware of these changes and be prepared to provide general information or direct employees to appropriate resources (e.g., studentaid.gov).
Payroll Implications: There is no direct payroll impact, but this is potentially helpful information for employees seeking guidance.
In summary, the OB3 presents significant opportunities for HR and payroll to support employees struggling with student loan debt through tax-advantaged benefits. HR and payroll teams must understand these changes, update their systems and policies and communicate the available benefits to employees.
7. Employer payments of student loans
Employer student loan repayment assistance remains a powerful employee benefit. This provision helps attract and retain talent by allowing such payments to remain tax-free for employees within defined limits.
Provision highlights:
This provision offers continued incentivization to employers to offer meaningful student loan repayment programs. Payroll should be configured to exclude these amounts from taxable wages.
8. Flexible Spending Accounts (FSA) dependent care
For plan years beginning on or after January 1, 2026, the OB3 increases the maximum annual amount an employee can exclude from taxable income under an employer-provided dependent care assistance program:
- From $5,000 to $7,500 for most taxpayers.
- From $2,500 to $3,750 for married couples filing separately.
This is the first permanent increase to the Dependent Care Flexible Spending Accounts (DCFSA) limit since it was set at $5,000 in 1986.
Prior changes: While the Child and Dependent Care Tax Credit (CDCTC) was temporarily expanded under the American Rescue Plan Act of 2021 (ARPA) in response to COVID-19, that expansion did not permanently change the DCFSA exclusion limit.
Looking ahead to tax year 2026
The IRS is working on new guidance and updated forms for tax year 2026. These will include changes to how tips and overtime pay are reported. The IRS will coordinate with employers, payroll providers and tax professionals to ensure a smooth transition.
More information will be shared in the coming months about how taxpayers can claim OB3-related tax benefits when they file their returns. The Treasury Department and the IRS are preparing additional guidance for both reporting entities and individual taxpayers.
Read the full IRS announcement here.
Next steps for employers and HR professionals
Navigating the OB3's complex provisions may seem challenging, but understanding these key changes will keep your organization compliant and ahead of the curve. Many provisions require close monitoring as IRS guidance evolves.
Partnering with the right HCM solution provider, like B2E Solutions can help ensure your systems, processes and teams remain compliant and ready for whatever comes next. Now is the perfect time to review your payroll systems and prepare for the full rollout of OB3.
We’ll be continuing to explore OB3 updates in upcoming editions of our client newsletter. To find out how our team and HCM Solution, UKG Ready, can help, contact us today.
