How the One Big Beautiful Bill Will Reshape Payroll Taxes
- Priscilla Wolfe
- Jul 19
- 12 min read
Updated: Jul 31
One Big Beautiful Bill Will Reshape Payroll Taxes
On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBBA) into law, ushering in sweeping changes to the U.S. tax code. While the bill covers nearly 900 pages of reforms, some of the most immediate and impactful changes center around employee payroll —especially for tipped and hourly workers. Provisions are still be rolled out. I suggest bookmarking this page as it may be updated over time.
From the White House: https://www.whitehouse.gov/obbb/
No Federal Income Tax on Overtime and Tips
One of the headline provisions is the temporary elimination of federal income tax on:
Overtime Premium Pay:
An above-the-line federal income tax deduction for qualified overtime compensation. This applies only to overtime required under the Fair Labor Standards Act (FLSA)—Only federally mandated overtime qualifies—not state-specific rules or union-negotiated overtime.
Overtime premium pay is the additional compensation paid to non-exempt employees and self-employed individuals, with proper documentation, for working hours beyond their standard workweek, typically 40 hours. This premium is usually calculated at 1.5 times the employee's regular rate of pay, commonly referred to as "time-and-a-half".
The purpose of overtime premium pay is to compensate employees for the extra effort and time they put in beyond their normal schedules, and it also serves as an incentive for employers to manage work hours effectively.
Employees can deduct up to $12,500 annually single filers ($25,000 for married joint filers) from their taxable income for the premium portion of overtime pay.
Phasing out for income above $150,000 single and $300,000 married joint filers.
Reporting Requirements:
Employers must itemize qualifying overtime on Form W-2.
IRS will provide transition relief for 2025, allowing “reasonable approximations”
What Doesn’t Count
Overtime required only by state law (e.g., California’s daily OT rules).
Holiday pay, shift differentials, or contractual bonuses.
This means that, for example, where a non-exempt employee’s hourly rate is $10.00 (and the corresponding overtime rate is $15.00 per hour) and the employee works one hour beyond 40 hours in a work week (so, a total of 41 hours), the available deduction is only for the $5.00 of overtime premium for that one overtime hour – and not for the $10.00 of regular straight time pay.
Still subject to FICA taxes and state income tax.
How the One Big Beautiful Bill Will Reshape Payroll Taxes
"No tax on tips" provision (2025-2028) Qualified Tips:
A Deduction, Not an Exclusion: A deduction of up to $25,000 for qualified tips is introduced for the 2025-2028 tax years. While this is a deduction from federal income tax, tips remain subject to income and payroll taxes, and potentially state and local taxes.
Who Qualifies? Employees and self-employed individuals in occupations that customarily received tips before 2025 may be eligible, with the IRS expected to publish a list of eligible occupations.
Income Limits: The deduction phases out for those with a modified adjusted gross income over $150,000 ($300,000 for joint filers).
Reported Tips: Tips must be properly reported on Form W-2, Form 1099, or other employer statements, or reported directly on Form 4137.
LIVING ON $15 PER HOUR
What This Means for Employers
No Immediate Payroll Changes: Employers will continue withholding federal income tax, Social Security, and Medicare taxes as usual either Semi Monthly or
Bi Weekly. The deductions apply when employees file their tax returns. Start tracking qualified overtime and tips now to catch those 2025 deductions.
TAX PLANNING is always recommended see why:
2025 Comparison Tax pdf
Keep in mind:
FUTA (ER) SUI (ER), Garnishments (EE), State Income Taxes (EE) Holidays and Vacation Time (usually 14 days), are not included with these comparisons. *Self Employed and S Corp are responsible for the total 15.3% Social Security and Medicare, 1/2 can be deducted at the end of the year.
Includes a sample budget with Lending rule 28/36: Calculate your Buyability with Zillow!
(In question: Should Social Security and Medicare be calculated on taxable wages or gross wages? we says "on taxable wages".) The calculations below use gross wages calculations SS & Med. *Speak with your investment advisor regarding the type of 401K and other deductions from your paycheck to determine SS & Med taxation. Avoid double taxation See Pub 525 and 401K Resource Guide
Married
Single
Commentaries:
1.) Committee for a Responsible Federal Budget. (2025, July 24). Retirees face an $18,100 benefit cut in 7 years. https://www.crfb.org/blogs/retirees-face-18100-benefit-cut-7-years
2.) Richards, K., & Rosinplotz, N. (2025, June 5). It’s time to end joint tax filing. Roosevelt Institute. https://rooseveltinstitute.org/publications/its-time-to-end-joint-tax-filing
3.) Joseph, C. E. (n.d.). What is marital status discrimination? Working Now and Then. https://www.workingnowandthen.com/marital-status-discrimination
New Reporting Requirements: Starting in 2026, employers must report qualified overtime and tips separately on Forms W-2 and 1099. Payroll systems will need updates to comply with this change.
Effective Dates by Provision
Provision | Effective Date |
Overtime Pay & Tip Deductions | Retroactive to January 1, 2025 and lasts through 2028 |
Child & Dependent Care Tax Credit | Begins January 1, 2026 |
Dependent Care FSA (DCAP) increase | Begins January 1, 2026 |
Employer-Provided Child Care Credit (45F) | Begins January 1, 2026 |
Paid Family Leave Credit | Begins January 1, 2026 |
Above-the-line Charitable Deduction | Begins January 1, 2026 |
MAGA Retirement Accounts | Covers children born 2025–2028, accounts open starting January 1, 2026 |
No Tax on Car Loan Interest
New deduction: Effective for 2025 through 2028, individuals may deduct interest paid on a loan used to purchase a qualified vehicle, provided the vehicle is purchased for personal use and meets other eligibility criteria. (Lease payments do not qualify.)
Available to non-itemizers and itemizers alike
Maximum annual deduction is $10,000.
Deduction phases out for taxpayers with modified adjusted gross income over $100,000 ($200,000 for joint filers).
Qualified interest: To qualify for the deduction, the interest must be paid on a loan that is:
Originated after December 31, 2024
Used to purchase a new vehicle, the original use of which starts with the taxpayer (used vehicles do not qualify)
For a personal use vehicle (not leased or for business or commercial use) and
Secured by a lien on the vehicle.
If a standard auto loan on a qualifying vehicle is later refinanced, interest paid on the refinanced amount is generally eligible for the deduction.
Qualified vehicle: A qualified vehicle is a car, minivan, van, SUV, pick-up truck or motorcycle, with a gross vehicle weight rating of less than 14,000 pounds, and that has undergone final assembly in the United States.
Taxpayer eligibility: Deduction is available for both itemizing and non-itemizing taxpayers.
The taxpayer must include the Vehicle Identification Number (VIN) of the qualified vehicle on the tax return for any year in which the deduction is claimed.
Reporting: Lenders or other recipients of qualified interest must file information returns with the IRS and furnish statements to taxpayers showing the total amount of interest received during the taxable year. The IRS will provide transition relief for tax year 2025 for interest recipients subject to the new reporting requirements.
Income Phase-Out
Full deduction for:
MAGI ≤ $100K (single)
MAGI ≤ $200K (married filing jointly)
Deduction reduced by $200 per $1,000 over threshold
Fully phased out at:
$150K (single)
$250K (MFJ)
Example: Buyer with $44K loan at 6.5% interest could deduct ~$3,000 in year one
In 22% tax bracket, that’s a $660 tax savings
Child and Dependent Care Credit (CDCTC)
Starting in 2026, the CDCC gets a serious upgrade:
Enhanced standard deduction and child tax credit from 35% to 50% of qualifying expenses for low-income families.
You can claim up to $3,000 for one child or $6,000 for two or more.
The income threshold for the lowest 20% credit jumps to $206,000 for joint filers and $103,000 for individuals, meaning more middle-income families qualify.
Estimated 4 million families will see a $900 increase in their credit.
Dependent Care Flexible Spending Account (DCAP)
Families with access through a participating employer will be able to set aside up to $7,500 in pre-tax dollars per year into a Dependent Care FSA (Flexible Spending Account) - thereby reducing their taxable income.
Note: Funds set aside in a Dependent Care FSA are "use it or lose it," so it is important that participants set aside no more than they are sure they will spend during the applicable tax year.
Employer-Provided Childcare Credit (45F)
Businesses get more incentive to support working parents starting in 2026:
Credit rate jumps from 25% of qualified childcare facility expenditures and 10% of qualified childcare resource and referral expenditures.
Maximum credit increases from $150,000 to $500,000–$600,000.
Small businesses can now pool resources to offer childcare solutions.
More information is available: https://www.irs.gov/businesses/small-businesses-self-employed/employer-provided-childcare-credit
Education & Workforce
Reforms to student loan repayment (limits, fewer plans, stricter deferments)
Eliminates most existing income-driven repayment (IDR) plans, including SAVE, PAYE, and ICR.
Replaces them with just two options for new borrowers (loans disbursed after July 1, 2026):
Standard Plan: Fixed monthly payments over 10–25 years, based on loan balance.
Repayment Assistance Plan (RAP): Income-based payments (1%–10% of AGI), with forgiveness after 30 years.
Borrowing Caps
Grad PLUS loans eliminated.
New limits:
Graduate students: $20,500/year, $100,000 lifetime.
Professional/medical students: $50,000/year, $200,000 lifetime.
Parent PLUS loans: $20,000/year, $65,000 lifetime.
Changes for Existing Borrowers
Can keep New IBR (10% of income, 20-year forgiveness) if enrolled before July 1, 2026.
Must switch to IBR or RAP by July 1, 2028—or be auto-enrolled in the Standard Plan.
Deferment & Forbearance Restrictions
Economic hardship and unemployment deferments eliminated.
Borrowers may use forbearance for up to 9 months in any 24-month period—but interest continues to accrue.
Public Service Loan Forgiveness (PSLF)
RAP payments count toward PSLF, if all other criteria are met.
Parent PLUS loans disbursed after July 1, 2026 are excluded from PSLF eligibility.
Impact on Graduate & Professional Students
Loss of Grad PLUS loans and tighter caps may push students toward private loans.
Could affect access to high-cost programs like medical and law school.
Changes to Pell Grant eligibility
Tighter Eligibility Rules
No Pell Grant if a student receives non-federal aid (state, institutional, or private) that fully covers their cost of attendance.
Students with a Student Aid Index (SAI) exceeding twice the maximum Pell Grant award are now ineligible.
Foreign income must now be included in AGI when calculating Pell eligibility—no more discretionary exclusions by financial aid officers.
Access for Workforce Training
Workforce Pell Grants for short-term, accredited programs:
Must be 8–15 weeks long and 150–600 clock hours.
Programs must lead to stackable, portable credentials or prepare students for jobs with a single recognized credential.
Must meet 70% completion and job placement rates.
Tuition must be below graduates’ median value-added earnings.
Must be approved by the state governor as aligned with in-demand jobs.
Funding Boost
Provides $10.5 billion to fully fund the Pell Grant reserve and address shortfalls projected for FY2025–2026
These changes kick in July 1, 2026, and are designed to shift Pell Grants toward career-focused, high-return programs while tightening rules for traditional aid recipients. Compare OBBB vs Current FAFSA rules
I recommend following Candidly for the latest news
Paid Family and Medical Leave Credit
Made permanent: The credit, originally set to expire at the end of 2025, is now a permanent fixture.
Expanded eligibility:
Employers can now claim the credit for a portion of premiums paid for paid family leave insurance policies, not just direct wage payments. Treat premiums the same as direct wages for credit purposes.
Employee tenure requirement drops from 12 months to 6 months, making more workers eligible.
Credit range: Employers can claim 12.5% to 25% of qualifying wages or premiums, depending on the percentage of wages replaced.
Written policy required: Employers must maintain a formal family leave policy to qualify.
No double-dipping: Businesses can’t deduct the cost of premiums and also claim the credit.
What Are Insurance-Based Leave Programs?
Employers buy group insurance policies from private carriers or state programs.
The policy pays employees while they're on family leave, parental leave, or medical leave.
Employers don’t have to budget for leave payouts—they pay premiums, and the insurer handles the rest.
Dependent Care Assistance Program (DCAP)
Dependent Care Flexible Spending Account (DCFSA)
OBBB permanently raises the annual contribution limit:
From $5,000 to $7,500 (or $3,750 for married filing separately).
Contributions are pre-tax, reducing taxable income and helping families budget for care.
Funds go into a dedicated FSA that you use to pay for:
Child care
After-school programs
Day camps
Nursery school and preschool (if care-related)
Deduction for Seniors
For most middle-income seniors, this deduction wipes out federal tax on Social Security benefits.
Nearly 88% of seniors will owe zero tax on their Social Security income
High earners won’t benefit—but for retirees with modest pensions or part-time income, it’s a game-changer.
Senior Deduction Highlights
Amount: Up to $6,000 per qualifying individual age 65+.
Married couples where both qualify can claim $12,000.
Eligibility:
Must be 65 or older by the last day of the tax year.
Must include Social Security Number on the return.
Must file jointly if married.
Income Phase-Out:
Begins at $75,000 (single) / $150,000 (joint).
Fully phased out at $175,000 (single) / $250,000 (joint).
Stackable:
Can be claimed in addition to the standard deduction.
Available whether you itemize or not.
Timeline:
Applies to tax years 2025 through 2028.
MAGA Retirement Accounts
Short for Money Accounts for Growth and Advancement—are a new type of child-focused savings vehicle. While not as tax-advantaged as Roth IRAs or 529 plans, MAGA Accounts offer universal access, early compounding, and flexibility. While not directly a business perk, employers who contribute could position this as a unique family-friendly benefit.
Employer Contributions to MAGA Accounts
Employers can contribute up to $2,500 per year per child (indexed for inflation).
These contributions are excluded from the employee’s taxable income.
The business can deduct the contribution as a fringe benefit expense—similar to DCAP or educational assistance programs.
Contributions count toward the $5,000 annual cap on MAGA Account deposits.
Key Features of MAGA Accounts
$1,000 federal seed deposit for every U.S. citizen born between 2025 and 2028.
Parents, relatives, and even employers can contribute up to $5,000 per year until the child turns 8.
Funds are invested in low-fee, diversified U.S. equity index funds—no leverage allowed.
Tax-deferred growth; qualified withdrawals taxed at long-term capital gains rates.
Withdrawals allowed starting at age 18 for:
Higher education or credentialing
First-time home purchase
Starting a small business
Potential Growth
With full contributions and average market returns, accounts could grow to:
~$128K by age 18
~$350K by age 31
$7M+ by age 70 if untouched fact check: Calculator.net
$5000 per year for 7.3 years
Rally for Saving Our Youth with Minimum Wage Increase Contact Congress
Start working Part Time at age 15 years old at $38.50 per hour: see calculations below
Part Time
Sustainable Plan After College
Permanently expands the above-the-line charitable deduction
For taxpayers who don’t itemize—a major shift aimed at democratizing philanthropy. Before OBBB, only itemizers (about 10% of taxpayers) could deduct charitable gifts. This change opens the door for 90%+ of filers to get a tax benefit for giving. It’s modeled after a temporary COVID-era provision that saw 90 million taxpayers claim a similar deduction.
Starting in 2026, non-itemizers can deduct:
Up to $1,000 for single filers
Up to $2,000 for married couples filing jointly
This deduction is above-the-line, meaning it reduces your adjusted gross income (AGI) even if you take the standard deduction
Only cash donations to qualified 501(c)(3) public charities
No deductions for:
Donor-advised funds (DAFs)
Private foundations
Non-cash gifts (e.g., clothing, furniture, stock)
Limits and Phase-Outs
Only the premium portion of overtime (the extra 1/2 of time and a half pay) qualifies—not the full time-and-a-half rate.
Mandatory service charges and automatic gratuities are excluded from the tip deduction.
The deductions begin to phase out for individuals earning over $150,000 ($300,000 for joint filers).
Deduction | Phase-Out Threshold | Max Deduction | Notes |
Overtime Premium Pay Deduction | $150K (single) / $300K (MFJ) | $12,500 (single) / $25,000 (MFJ) | Applies to federally mandated overtime only |
Tip Income Deduction | $150K (single) / $300K (MFJ) | Up to $25,000 | Only for cash/charged tips in approved occupations |
Senior Bonus Deduction | $75K (single) / $150K (MFJ) | $6000 single/ $12,000 MFJ | Applies to taxpayers age 65+ |
Strategic Planning Tips
Income Shaping:
Because many of these benefits phase out based on income, adjusting your taxable income—like increasing 401(k) contributions—could help you qualify for a larger credit in 2026.
Fringe Benefit Optimization:
Boost DCAP limits to $7,500, reducing taxable income for employees
Layer in student loan repayment exclusion, MAGA contributions, and childcare credits for rich benefit stacks
Integrating insurance-based leave programs means employers can offer paid family or medical leave not by directly paying wages out-of-pocket, but by purchasing insurance policies that cover a portion of an employee’s leave compensation.
Asset Allocation Tactics:
MAGA accounts grow tax-deferred—introduce compounding concepts early in client education
Charitable Giving Strategy:
For clients who don't itemize: promote annual “micro-gift plans” that hit the $1K/$2K caps efficiently and cleanly
The One Big Beautiful Bill is poised to reshape payroll practices and tax for millions of workers and employers. While the full impact will unfold over the coming years, now is the time for businesses to prepare for new reporting standards and explore how these changes might affect their workforce. More on what you need to know from Working Now and Then: Joseph, C. E. (n.d.). What is marital status discrimination? Working Now and Then. https://www.workingnowandthen.com/marital-status-discrimination/
Additional Provisions of OBBB include:
Agriculture & Rural America
Updates to Price Loss Coverage (PLC) and Agriculture Risk Coverage (ARC)
Expanded base acres eligibility
Enhanced Dairy Margin Coverage (DMC)
Increased commodity loan rates
Investments in conservation, trade, research, forestry, and energy
Defense & Armed Services Funding for:
Military quality of life
Shipbuilding, munitions, air/missile defense
Cybersecurity, Indo-Pacific readiness, and nuclear forces
Authorized military construction projects
Expanded ICE and border enforcement budgets
Energy & Environment
Repeals of Inflation Reduction Act climate programs
Expanded oil, gas, coal leasing
Streamlined pipeline permitting
Strategic Petroleum Reserve reforms
Repeal of EPA/NHTSA emissions rules
Health Care
Medicaid reforms:
Stricter eligibility verification. Able bodied adults without dependents will need to prove they're working 80 hours per month. (exceptions under 19 or over 64, pregnant or a veteran with a disability)
Reduced retroactive coverage
Limits on gender transition procedures for minors
ACA Exchange fraud prevention
Delayed DSH payment cuts
Expanded orphan drug exclusions
Medicare payment updates
Read more about how this could affect cancer patients: LiveStrong
Technology & Communications
Spectrum auctions and modernization
AI and IT infrastructure investment
See Also: Tip recordkeeping and reporting
See Also: Fringe Benefit Guides:
See Also: Employee Reimbursed Expenses
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