With the One Big Beautiful Bill (OBBB), a number of provisions impact employers.  Below is a summary of the major ones.

No tax on overtime:

Workers will be able to deduct up to $12,500 (or $25,000 for joint return) in overtime pay from their taxable income on their federal tax returns.  It is retroactive to January 1, 2025.  The deductions are temporary and set to expire at the end of 2028 unless extended.  It would apply to non-exempt employees only.  The deduction phases out for non-exempt employees who earn more than $150,000 (or $300,000 joint return). 

No tax on tips: 

All reported tips up to $25,000 per person per year are now exempt from federal income tax.  The provision applies only to tips reported to employers and reflected on W-2 forms. It is retroactive to January 1, 2025. The IRS has indicated that only certain jobs will be covered under the exemption. These generally fall into sectors where tipping is customary and expected. Tips received for services in "health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services" do not qualify for the deduction. The deductions are temporary and set to expire at the end of 2028 unless extended.  The deduction phases out for non-exempt employees who earn more than $150,000 (or $300,000 joint return). 

Caveat for both: 

W-2 and payroll need to be updated to comply with the new law.  State and local taxes still apply; it is a federal income tax exemption only.  Payroll taxes will still be deducted.  Employees must have a valid social security number.

Trump Accounts:

The OBBB establishes a new type of custodial account for minors called Trump Accounts.  These Trump Accounts would be a form of Individual Retirement Account (but not a Roth IRA) and would generally be treated in the same manner as an IRA.

1. Eligible for U.S. children born Jan 1, 2025–Dec 31, 2028, provided at least one parent has a work-eligible SSN.
2. Initially funded with $1,000 by the Treasury, set to be automatically opened if not claimed via tax filing.
3. Trump account funds can grow tax-free until they are withdrawn but must be invested in mutual funds or ETFs that track the returns of a qualified index (such as the S&P 500 or other index funds that are primarily comprised of U.S. companies), do not use leverage, do not have annual fees and expenses of more than .1% of the balance of the fund investment, and meet other criteria Treasury determines appropriate.
4. The contribution limit for a taxable year is $5,000 (other than qualified rollover contributions) and is adjusted for inflation for taxable years after 2027. Contributions can only be made in calendar years before the beneficiary turns 18 and will not be accepted until 12 months after the date of enactment of the legislation.
5. Employers may contribute up to $2,500 (adjusted for inflation for taxable years after 2027) to the Trump Account of an employee or the employee’s dependent without it being taxable to the employee. To offer this benefit, employers must adopt a plan document and comply with similar nondiscrimination requirements that apply to dependent care assistance programs.
6. No distributions are permitted before the first day of the calendar year in which the beneficiary turns 18 (other than distributions of qualified rollover contributions). The rules applicable to distributions from IRAs generally apply.

Dependent Care Flexible Spending Account:

Employers may offer employees dependent care flexible spending accounts (DCFSAs), which generally allow employees to contribute wages to a DCFSA pre-tax and then use the DCFSA to reimburse, on a tax-free basis, dependent care expenses incurred by the employee. For many years, the maximum DCFSA contribution amount has been $5,000 ($2,500 for married individuals filing separately). The legislation increases those amounts to $7,500 and $3,750, respectively, for tax years beginning after Dec. 31, 2025.

Health Savings Accounts (HSA) changes:

1. A COVID-era exemption previously allowed individuals to receive telehealth services without applying a deductible and maintain eligibility to make HSA contributions. The OBBB retroactively reinstates the exemption to when the original exemption expired and makes the exemption permanent.
2. The OBBB also allows an individual to remain eligible to make HSA contributions if the individual participates in a “direct primary care service arrangement,” which generally means an arrangement whereby the individual receives primary care services from primary care providers in exchange for a fixed fee. This eligibility rule does not apply if the fixed fee exceeds $150 per month ($300 per month if the arrangement applies to multiple individuals), and such amounts will be adjusted annually. In addition, direct primary care service arrangement fees are treated as medical expenses that can be paid using an HSA.  This change applies prospectively after December 31, 2025.
3. Anyone enrolled in a bronze or catastrophic health plan offered in the individual insurance market through the Marketplace is eligible to have and contribute to an HAS – effective January 1, 2026.

Executive Compensation in Excess of $1 million (Public Companies): 

Public companies cannot deduct more than $1 million with respect to compensation for a small number of top employees (technically called “covered employees”). For tax years beginning after Dec. 31, 2025, the legislation modifies the rule to apply it to “specified covered employees” in the public company’s controlled group. Specifically, (i) a specified covered employee’s compensation from all controlled group members will be considered; and (ii) in determining who the specified covered employees are, identifying the five highest-paid employees would be determined by analyzing the entire controlled group’s employee population. Other than the criteria above, specified covered employees will be determined by the other three existing criteria used for identifying “covered employees,” which would still apply based solely on the public company’s employee population.

Executive Compensation in Excess of $1 million (Non-Profits): 

Under Section 4960, many tax-exempt organizations must pay an excise tax if they pay covered employees more than $1 million or make excess parachute payments. The amount of the excise tax is 21% of the remuneration paid to covered employees in excess of $1 million plus 21% of any excess parachute payment.  The OBBB expands the definition of “covered employee.” Currently, a covered employee means either (a) one of the five highest compensated employees of the organization for the taxable year or (b) an employee who was a covered employee for the organization (or a predecessor) for any preceding taxable year after 2016.  Under the OBBB, the excise tax now captures employees outside of the five highest compensated employees if they earned more than $1 million. Therefore, exempt organizations with employees earning more than $1 million may wish to reconsider some of their compensation plans.

Student Loan Repayment:

Code Section 127 allows employers to offer up to $5,250 of educational assistance tax-free to employees. The definition of “educational assistance” was previously expanded to include assistance related to an employee’s student loans. The OBBB makes this expansion, which was set to expire at the end of 2025, permanent. The legislation also adds language providing for an inflation adjustment. 

Bicycle Commuting Expenses:

The ability to offer tax-free reimbursement for bicycle commuting expenses, sometimes called a “transportation fringe,” has been permanently eliminated under the OBBB. A $20 per month tax-exempt reimbursement from employers to employees for qualified bicycle commuting reimbursement was set to return in 2026.

Deduction for Employer Provided Meals:

Effective for amounts paid or incurred after Dec. 31, 2025, the law added a prohibition on deductions for certain expenses related to (1) meals provided to employees and their spouses and dependents by the employer on its premises, and (2) an employer’s operation of an eating facility for employees (including food and beverage costs). The OBBB retains this deduction prohibition but adds a small carve-out. Specifically, the deduction prohibition will not apply if the expenses relate to (i) a good or service for which the employer receives adequate consideration in a bona fide transaction, or (ii) food or beverages provided on or at certain commercial vessels, oil or gas platforms, and fishing vessels or fish processing facilities.

Employer Provided Childcare:

The OBBB increases the maximum employer credit for employer-provided childcare. Historically, businesses could receive a credit on 25% of qualified childcare expenses provided to employees (up to $150,000). The OBBB increases the maximum credit to 40% of qualified childcare expenses (up to $500,000). Additionally, the OBBB includes a new provision for small businesses, allowing a credit of 50% of qualified childcare expenses (up to $600,000). The OBBB also allows small businesses to pool resources to provide childcare and allows businesses to utilize the services of a third-party intermediary, while retaining eligibility for the tax credit. This is effective for amounts paid or incurred after December 31, 2025.

Paid Family and Medical Leave Tax Credit:

Permanently establishes the employer credit for paid family and medical leave under Internal Revenue Code (IRC) section 45S.  Applies to a percentage of wages paid to employees while on leave or to insurance policy premiums, The credit is not available when paid family leave is mandated by state or local government.

The above is a sampling of tax changes HR needs to be aware of.  For more information, contact your tax advisor.

ASE Connect

Source: Baker Hostetler 7/8/25, Employee Benefits Corporation 7/7/2025, National Law Review 7/3/25