Decoding the One Big Beautiful Bill Act for employers, employees, and businesses

The tax landscape has just undergone a significant shift with the signing of the One Big Beautiful Bill Act (OBBBA) on July 4, 2025. Touted as a generational achievement, this comprehensive new law introduces sweeping changes that touch everything from how you pay for a new car to how your overtime earnings are taxed, and even how businesses invest and manage their employee benefits.

Navigating new tax rules can feel like trying to solve a complex puzzle, but you don't have to do it alone. In this comprehensive guide, we're breaking down the most impactful provisions of the OBBBA into plain, understandable English. Whether you're an employee wondering how to save more of your hard-earned cash, an employer strategizing for new reporting requirements, or a business owner looking to optimize tax benefits, we're here to help you understand these crucial updates and prepare for what's ahead.

No Tax on Overtime: Rewarding Extra Hours Worked

What Does the Law State?

The law allows individuals to deduct "qualified overtime compensation" from their federal taxable income. This deduction is limited to $12,500 annually for individuals and $25,000 for those filing jointly. It applies specifically to the overtime compensation that is required under Section 7 of the Fair Labor Standards Act of 1938 (FLSA) and is the amount paid in excess of an employee's regular rate of pay.

Who are Eligible Employees?

Generally, eligible employees are non-exempt workers who receive overtime compensation as mandated by the federal Fair Labor Standards Act (FLSA). This typically means hourly employees who work more than 40 hours in a standard workweek. It's important to note that highly compensated employees (often salaried and exempt from overtime rules) are generally not eligible for this deduction.

What is Qualified Overtime Compensation?

"Qualified overtime compensation" is specifically defined as the premium portion of your overtime pay that is required by federal law (FLSA). It's essentially the "half" in "time-and-a-half" pay.

For instance, if your regular hourly rate is $20 and your overtime rate is $30 per hour (time and a half), the $10 difference ($30 - $20 = $10) is the "premium" portion that qualifies for this deduction. Overtime pay required solely by state laws, company policies, or collective bargaining agreements that exceed FLSA requirements typically does not qualify unless it also meets the FLSA definition.

Breaking Down the Law in Plain English

In straightforward terms, if your job requires you to work overtime and you get paid extra for those hours according to federal law, you'll be able to reduce your federal income tax bill. The government is creating a new tax break specifically for the extra money you earn from working those additional hours, up to a certain yearly limit. This means you get to keep more of your hard-earned overtime pay.

Key Facts About the No Tax on Overtime Law

• Deduction Limit: You can deduct up to $12,500 in qualified overtime pay each year as an individual filer, or $25,000 if you file jointly with your spouse.
• Effective Period: This deduction is temporary, in effect for tax years 2025 through 2028.
• Broad Eligibility: Similar to the "No Tax on Tips" deduction, this benefit is available whether you choose to itemize your deductions or take the standard deduction on your tax return.
• Identification Requirement: You'll generally need to include your Social Security Number on your tax return to claim this deduction.

Are There Any Exceptions or Limits?

Yes, just like with the tips deduction, there are income thresholds that can limit or eliminate your ability to claim the full "No Tax on Overtime" benefit:

• The deduction begins to "phase out" (meaning it gradually reduces) for individuals whose modified adjusted gross income (MAGI) is over $150,000.
• For married couples filing jointly, the deduction starts to phase out when their combined MAGI exceeds $300,000.

Consider John, a skilled factory worker who often works a lot of overtime. The maximum deduction he can claim is $12,500.

• Scenario 1 (Full Deduction): If John's total modified adjusted gross income (including his regular pay and overtime) is $100,000, he is well below the $150,000 threshold. If he earns $12,500 or more in qualified overtime compensation, he can claim the full $12,500 deduction.
• Scenario 2 (Partial Deduction): Now, imagine John gets a promotion, and his modified adjusted gross income for the year reaches $170,000. Since this is above the $150,000 threshold, his $12,500 deduction will start to reduce. If the phase-out rate is $100 for every $1,000 over the limit, he's $20,000 over the threshold ($170,000 - $150,000). This would reduce his potential deduction by $2,000, meaning he could only deduct $10,500 ($12,500 - $2,000) of his qualified overtime, even if he earned more.

This phase-out ensures the deduction primarily benefits individuals and families below higher income brackets.

Who is This Law Applicable For?

This deduction is applicable for:

• Employees who receive overtime compensation that is required under the Fair Labor Standards Act (FLSA).
• While primarily for employees, some self-employed individuals might qualify if their compensation structure specifically includes FLSA-defined overtime.

What This Means for Employers

Employers with non-exempt employees who work overtime will also need to adjust their procedures due to the "No Tax on Overtime" provision:

• Federal Income Tax Withholding Remains: Similar to tips, employers are still required to withhold federal income tax from all wages, including overtime pay, as usual. The benefit for the employee comes when they file their annual tax return, not necessarily through immediate changes to their paychecks. The IRS is expected to update withholding tables to account for these new deductions.
• FICA Taxes Still Apply: It's crucial to remember that while qualified overtime may be exempt from federal income tax for employees, it remains subject to Social Security and Medicare taxes (FICA taxes). Employers must continue to withhold the employee's share and pay the employer's share of these payroll taxes on all overtime earnings.
• New W-2 Reporting Requirements: Employers will face new obligations for reporting qualified overtime. They must file information returns with the IRS (or SSA) and provide statements to taxpayers (like Form W-2) that clearly show the total amount of qualified overtime compensation paid during the year. This requires distinguishing FLSA-mandated overtime premium pay from other types of compensation.
• Payroll System Updates: Businesses will likely need to update their payroll and time-tracking systems to accurately identify, track, and separately report the specific portion of overtime pay that qualifies for this deduction. This might involve creating new earning codes or modifying existing ones.
• IRS Guidance and Transition Relief: The IRS has indicated it will provide specific guidance on how to report this qualified overtime compensation. For tax year 2025, there will be "transition relief," allowing employers to use "any reasonable method specified by the Secretary" to approximate and report qualified overtime amounts. This provides some flexibility as businesses adapt to the new rules.
• Policy Review: Employers should review their current overtime policies and employee classifications to ensure they align with FLSA requirements and the nuances of this new deduction.

No Tax on Tips: A New Break for Tipped Workers and What it Means for Businesses

What Does the Law State?

At its core, the "No Tax on Tips" law allows eligible employees and self-employed individuals to deduct "qualified tips" from their federal taxable income. This deduction is capped at $25,000 per year and applies to tips received in occupations that are officially listed by the IRS as customarily and regularly receiving tips.

Who are "Eligible Employees?"

Eligible employees are individuals who work in occupations where they customarily and regularly receive tips. While the IRS will provide a definitive list, this generally includes roles like servers, bartenders, barbers, hair stylists, nail technicians, and others in the hospitality and service industries who earn a portion of their income directly from customer gratuities. Both those employed by a business and self-employed individuals (like independent contractors who receive tips) can qualify.

What are "Qualified Tips?"

"Qualified tips" refer to the income received by an employee or self-employed individual directly from customers as gratuities for services rendered. This typically includes:

• Cash Tips: Money given directly by the customer in cash.
• Charged Tips: Tips added to a credit or debit card payment.
• Tips Received from Tip-Sharing or Pooling Arrangements: Money received from other employees as part of a formal or informal tip distribution system.

Essentially, any amount a customer voluntarily gives you in recognition of good service, which you report as income, can be considered a qualified tip for this deduction.

Breaking Down the Law in Plain English

Simply put, if you're a server, bartender, hair stylist, or work in another role where tips are a regular part of your earnings, this new law means you might pay less in federal income tax. The government is essentially saying that a certain amount of your reported tips, up to the annual limit, will no longer be subject to federal income tax. This aims to put more money directly into the pockets of tipped workers.

Key Facts About the "No Tax on Tips" Law

• Deduction Limit: You can deduct up to $25,000 of your qualified tips from your taxable income each year.
• Effective Period: This deduction is temporary, applying to tax years 2025 through 2028.
• Broad Eligibility: Whether you itemize deductions on your tax return or take the standard deduction, you can still claim this "No Tax on Tips" benefit.
• Identification Requirement: To claim this deduction, you will generally need to include your Social Security Number on your tax return.
• "Qualified Tips": This broadly includes voluntary cash tips, tips received via credit card, and amounts from tip-sharing arrangements.

Are There Any Exceptions or Limits?

Yes, there are income thresholds that can limit or eliminate the deduction for higher earners:

• The deduction begins to "phase out" (meaning it gradually reduces) for individuals whose modified adjusted gross income (MAGI) is over $150,000.
• For married couples filing jointly, the deduction starts to phase out when their combined MAGI exceeds $300,000. This ensures the benefit is primarily directed toward middle-income workers.

Imagine Sarah, a highly successful restaurant manager who also earns a significant amount in tips.

• Scenario 1 (Full Deduction): If Sarah's total modified adjusted gross income (including her salary and tips) is $120,000, she is well below the $150,000 threshold. In this case, she can claim the full "No Tax on Tips" deduction, up to $25,000, assuming she has that much in qualified tips.
• Scenario 2 (Partial or No Deduction): Now, let's say Sarah's total modified adjusted gross income is $180,000. Since this is above the $150,000 threshold, her ability to claim the full $25,000 deduction will be reduced. The law will specify the exact rate at which it phases out. For example, if it phases out dollar-for-dollar, she would lose $30,000 worth of her deduction eligibility ($180,000 - $150,000). If she only had $25,000 in tips, she might not be able to claim any of it. If her MAGI was very high, say $250,000, she would likely not be able to claim any of the deduction at all, even if she received a lot of tips.

This "phase-out" mechanism ensures that the tax benefit is targeted towards those earning below certain income levels, rather than providing an unlimited deduction for very high earners.

Who is This Law Applicable For?

This deduction is applicable for:

• Employees who receive tips as part of their compensation in IRS-listed occupations.
• Self-employed individuals who receive tips in these same types of occupations.

What This Means for Employers

While the direct tax savings are for employees, the "No Tax on Tips" provision also brings important updates and responsibilities for businesses that employ tipped staff:

• Continued Tip Reporting is Crucial: This law does NOT eliminate the existing requirements for employees to report their tips to their employer, nor does it remove the employer's obligation to report these tips to the IRS (or the Social Security Administration). Employers must continue to accurately track and report all tips received by their employees.
• New W-2 Reporting Details: Employers will need to adjust their reporting. Specifically, they must provide more detailed information on Form W-2s, clearly showing the total amount of "cash tips" received by an employee and the employee's occupation. This will help the IRS verify claims for the deduction.
• FICA Taxes Still Apply: This is a crucial point for employers. While the "No Tax on Tips" deduction removes federal income tax on eligible tips for employees, these tips remain subject to Social Security and Medicare taxes (FICA taxes). Both the employee's and employer's shares of FICA taxes on tips must still be withheld and paid as usual.
• System and Payroll Adjustments: Businesses will likely need to update their payroll and accounting systems to accurately track and separately report qualified tip amounts as required by the new law. This ensures compliance with the updated reporting standards.
• IRS Guidance and Transition Period: The IRS is expected to issue more detailed guidance on this new law, including a definitive list of occupations that "customarily and regularly" receive tips. Importantly, for tax year 2025, the IRS has announced that it will provide "transition relief" for employers. This means there will be some flexibility for businesses as they adapt to these new reporting requirements.
• Expanded FICA Tip Credit: A positive note for many businesses is the expansion of the existing FICA tip credit. Previously, this credit for the employer's share of Social Security taxes paid on tips was primarily for food and beverage services. The new law extends this valuable credit to include beauty service establishments (like barber shops, hair salons, nail salons, and spas), offering more businesses a potential tax benefit for their tipped employees.

No Tax on Car Loan Interest: A Boost for New Vehicle Buyers

The "One Big Beautiful Bill Act" also introduces a brand-new tax deduction designed to ease the financial burden of purchasing a new vehicle. For the first time in decades, individuals can deduct a portion of the interest they pay on their car loans, aiming to make new car ownership more affordable for many American families.

What Does the Law State?

The law allows individuals to deduct up to $10,000 annually in interest paid on loans specifically used to purchase new, personal-use qualified vehicles. This deduction is available for loans originated after December 31, 2024, and the Vehicle Identification Number (VIN) of the qualifying vehicle must be included on the tax return.

Who are "Eligible Individuals?"

Any taxpayer who takes out a loan to purchase a new, qualified vehicle for personal use after December 31, 2024, can be an eligible individual. This deduction is not limited to those who itemize their taxes; it's an "above-the-line" deduction, meaning it reduces your adjusted gross income regardless of whether you take the standard deduction.

What are "Qualified Vehicles?"

To be a "qualified vehicle," a car must meet several specific criteria:

• New Purchase: The vehicle must be new, meaning its original use must begin with you, the taxpayer. Used vehicles do not qualify.
• Personal Use: It must be purchased for personal use, not for business, fleet sales, or commercial purposes.
• Vehicle Type: This includes new cars, minivans, vans, SUVs, pickup trucks, or motorcycles.
• Weight Limit: The vehicle must have a gross vehicle weight rating (GVWR) of less than 14,000 pounds.
• Made in the U.S.: Crucially, the vehicle must have undergone its final assembly in the United States. The IRS is expected to provide resources, similar to those for EV tax credits, listing qualifying vehicles. Generally, VINs starting with 1, 4, or 5 indicate U.S. final assembly.
• Secured Loan: The interest must be paid on a loan that is secured by a first lien on the vehicle. This means lease payments do not qualify.

Breaking Down the Law in Plain English

If you're planning to buy a brand-new car, truck, SUV, or motorcycle that was assembled in the U.S. and you finance it with a loan, you could save money on your federal taxes. This new rule allows you to subtract a portion of the interest you pay on that car loan from your taxable income, up to a $10,000 limit each year. It's a way for the government to make owning a new, American-made vehicle a little more affordable.

Key Facts About the "No Tax on Car Loan Interest" Law

• Deduction Limit: You can deduct up to $10,000 in qualified car loan interest annually.
• Effective Period: This deduction applies to loans originated after December 31, 2024, for tax years 2025 through 2028.
• Broad Eligibility: You can claim this deduction whether you itemize deductions or take the standard deduction.
• VIN Requirement: You must include the Vehicle Identification Number (VIN) of your qualified vehicle on your tax return for any year you claim the deduction.
• Loan Specifics: The loan must be a standard, secured auto loan; refinanced loans may qualify if the original loan also qualified and the refinancing doesn't increase the principal.

Are There Any Exceptions or Limits?

Yes, there are income limitations that can reduce or eliminate this deduction for higher earners:

• The deduction begins to phase out for individuals with a modified adjusted gross income (MAGI) over $100,000.
• For married couples filing jointly, the deduction phases out if their combined MAGI is over $200,000.

Consider Maria, who just bought a new U.S.-assembled SUV and expects to pay $4,000 in qualified car loan interest this year.

• Scenario 1 (Full Deduction): If Maria's total modified adjusted gross income is $90,000, she is below the $100,000 threshold. She can claim the full $4,000 deduction for her car loan interest.
• Scenario 2 (Partial Deduction): Now, let's say Maria's modified adjusted gross income is $120,000. This is $20,000 over the $100,000 threshold. The deduction is reduced by $200 for each $1,000 (or portion thereof) over the limit. So, for being $20,000 over, her deduction would be reduced by $4,000 (20 x $200). In this case, even though she paid $4,000 in interest, she would not be able to claim any of the deduction because her income pushed her past the phase-out.

This income-based phase-out ensures the benefit is targeted toward a broad range of car buyers, but not those in the highest income brackets.

Who is This Law Applicable For?

This deduction is applicable for individuals who purchase a new, U.S.-assembled qualified vehicle for personal use with a loan originated after December 31, 2024.

What This Means for Employers and Lenders

This deduction primarily impacts financial institutions that provide auto loans, rather than directly affecting the payroll or tax obligations of a general employer whose employees might be taking advantage of this deduction. Lenders and other recipients of qualified car loan interest payments totaling $600 or more annually are now required to file information returns with the IRS and provide statements to borrowers (similar to a Form 1098-E for student loan interest), detailing the total interest received during the tax year. The IRS will provide transition relief for tax year 2025 to help these financial institutions comply with these new reporting requirements.

Research & Development Expenses (Section 174)

• Full Expensing Restored: The OBBBA restores the ability for businesses to immediately deduct domestic research or experimental (R&E) expenditures in the year they are incurred. This reverses a prior change (from the TCJA) that required these expenses to be capitalized and amortized over five years (or 15 years for foreign R&E).
• Effective Date: This change is applicable for tax years beginning after December 31, 2024.
• Retroactive Option for Small Businesses: Eligible small businesses (generally with average annual gross receipts not exceeding $31 million) can retroactively expense R&E expenditures for tax years beginning after December 31, 2021, by filing amended returns.
• Accelerated Amortization Option: Other taxpayers who have been amortizing R&E expenses from tax years beginning after December 31, 2021, and before January 1, 2025, can elect to accelerate the remaining unamortized amounts over a one- or two-year period.
• Foreign R&E: Foreign R&E expenditures still must be capitalized and amortized over 15 years.
• Employer/Business Impact: This is a significant win for businesses investing in innovation, particularly those in technology and life sciences. It provides greater control over cash flow and tax planning, and incentivizesU.S.-based R&D activities. Businesses should review their R&D spending and consider amending past returns or adjusting future accounting methods.

HSAs and Dependent Care FSAs - Changes and modifications

HSAs (Health Savings Accounts)

1. Telehealth Safe Harbor Permanent: The Act permanently extends the COVID-19 pandemic-era telehealth safe harbor, allowing High-Deductible Health Plans (HDHPs) to provide pre-deductible coverage for telehealth services without jeopardizing an individual's HSA eligibility. This is retroactive to December 31, 2024.
2. Expanded HDHP Eligibility: Starting in 2026, Bronze and Catastrophic level plans offered on the individual Health Marketplace Exchange will qualify as HDHPs for HSA purposes, even if they don't otherwise meet the traditional HDHP definition. This expands HSA eligibility for individuals enrolled in these plans.
3. Direct Primary Care (DPC) Arrangements: Starting in 2026, certain fees for Direct Primary Care arrangements (capped at $150/month for individuals, $300/month for families) can be considered qualified medical expenses and paid from an HSA, and these arrangements won't disqualify HSA eligibility.
4. Employer/Payroll Impact: Employers should review their HDHP designs and communication to employees, especially regarding telehealth and DPC. While employers are not required to change their HSA offerings, these changes provide more flexibility and expand eligibility, which could impact employee enrollment and contributions. No direct payroll withholding changes beyond existing HSA rules are indicated, but employee communication might be necessary.

Dependent Care FSAs (DCFSAs)

1. Increased Exclusion Limit: The maximum annual exclusion for employer-provided dependent care assistance (typically through a DCFSA) increases from $5,000 to $7,500 (or $3,750 for married couples filing separately). This is effective for tax years beginning after December 31, 2025.
2. Employer/Payroll Impact: Employers who offer DCFSAs will need to amend their Section 125 (cafeteria plan) documents, revise summary plan descriptions, and update open enrollment communications for the 2026 plan year to reflect the increased limit. This directly impacts payroll administration for these pre-tax deductions.

Tax Credit for Paid Family and Medical Leave (Section 45A)

• Credit Made Permanent: The employer tax credit for paid family and medical leave (originally from the TCJA and set to expire) is now permanently established. This applies to taxable years beginning after December 31, 2025.
• Expanded Eligibility:
  • Employers can now claim the credit for a percentage of premiums paid for family and medical leave insurance, not just wages paid directly.
  • The employee work tenure requirement is reduced from one year to six months.
  • The credit can apply to leave taken by employees working at least 20 hours per week.
• No Credit for Mandated Leave: The credit still does not apply to paid family and medical leave that is required by state or local law.
• Employer/Payroll Impact: This is a significant incentive for employers to offer voluntary paid family and medical leave. Employers should review their policies to determine if they qualify for this enhanced and permanent credit. Payroll systems may need to track qualifying wages or insurance premiums to accurately calculate the credit.

Childcare Tax Credit (Employer-Provided Childcare)

• Enhanced Employer Credit: The employer-provided childcare tax credit (IRC Section 45F) is significantly enhanced.
  • The credit percentage for qualified childcare expenses increases from 25% to 40% (and to 50% for eligible small businesses).
  • The maximum annual credit increases to $500,000 per employer ($600,000 for eligible small businesses), with both limits adjusted for inflation starting in 2027.
• Effective Date: Applies to amounts paid or incurred after December 31, 2025.
• Employer/Payroll Impact: This provides a much stronger incentive for employers to invest in or subsidize childcare programs, whether on-site or through third parties. It directly impacts a business's tax liability and may influence benefit offerings. Employers interested in providing childcare support should consult with tax advisors to understand how to maximize this credit.

Student Loan Repayment (Employer Contributions)

• Tax-Free Employer Contributions Made Permanent: The ability for employers to contribute up to $5,250 per year towards an employee's student loans on a tax-free basis (under an educational assistance program, IRC Section 127) has been made permanent. This provision was set to expire at the end of 2025.
• Inflation Adjustment: Beginning in 2026, the $5,250 annual cap will be indexed for inflation.
• Employer/Payroll Impact: This is a valuable tool for employers to attract and retain talent. Employer contributions within the limit are tax-free to the employee and tax-deductible for the employer as a business expense. Employers offering this benefit will need to ensure they have a written plan document, comply with non-discrimination rules, and update payroll systems to correctly process these tax-exempt payments.

The One Big Beautiful Bill Act brings significant changes and exciting opportunities for American workers, families, and businesses. Understanding these new provisions is key to maximizing your benefits and ensuring compliance. As you integrate these new rules into your financial planning, remember that tax laws can be complex and their application depends heavily on individual circumstances. 

Note: This blog post is designed to provide general information and is not intended to be a substitute for professional legal or tax advice. For personalized guidance on how the OBBBA specifically impacts your unique situation, we highly recommend consulting with a qualified tax expert or financial advisor who works in this category every day.