By now, you’ve probably heard of the One Big Beautiful Bill Act (OBBB), President Trump’s sweeping legislative initiative, which was narrowly passed by the House and Senate and signed into law on July 4, 2025. The final bill runs 331 pages, covering nearly every area of government: agriculture, nutrition, housing, energy, environment, armed services, homeland security, transportation, taxes, job creation, and more.
Rather than unpack all 331 pages of the OBBB, this article focuses on the provisions most relevant to employers—specifically six key areas:
Taxes on overtime pay
Taxes on tips
Dependent care flexible spending account (FSA) limits
Employer-provided childcare tax credit
1099 reporting requirements
- C-Corp tax advantages
1. Changes to Taxes on Overtime
Beginning with tax year 2025 (for taxes filed in 2026), employees in non-exempt positions can deduct up to $12,500 of “qualified overtime” earnings from their federal taxable income each year ($25,000 for joint filers). For highly compensated individuals (gross income over $150,000), the deduction is reduced.
Important notes:
Applies only to federal income tax. Overtime is still subject to Social Security, Medicare, and any state or local taxes.
“Qualified overtime” refers to the premium portion of overtime pay, not the full rate. For example, if an employee earns $15/hour and $22.50/hour for overtime, the deductible portion is $7.50/hour ($22.50 – $15). More information on overtime rules can be found here on the US Department of Labor’s website.
The deduction applies for 2025 through 2028.
- Need a refresher on the difference between exempt and non-exempt positions? It’s worth brushing up on the Fair Labor Standards Act (FLSA) laws.
For 2025, employers should withhold taxes as usual. The IRS will issue guidance on reporting since the W-2 won’t be updated until 2026 when a new Box 12 code – likely TT – is expected. A draft W-2 is already available on the IRS website. Payroll systems will then need to adjust to exclude qualifying overtime from federal taxable wages.
For this reason, employers should take steps soon to get ahead of the curve. If you don’t already have a solid time and attendance system, now’s a great time to get one in place. Accurate overtime tracking is going to matter a lot more once the new reporting rules kick in.
And it’s not just about compliance – this change may encourage employees to be more willing to take on extra hours when they realize they’ll get to keep more of what they earn. We share more details on how this change affects employees and employers on our blog post here.
2. Changes to Taxes on Tips
Another significant part of the OBBB is “no tax on tips.” Similar to how taxes on overtime will be handled, employees in tip-eligible industries can deduct up to $25,000 in tips from federal taxable income (reduced for high earners with income over $150,000).
Key details:
Applies only to voluntary tips, not mandatory service charges or automatically added gratuities.
Cash and credit card tips both qualify, as do tips received through tip-sharing arrangements.
- Applies only to federal income tax, not Social Security, Medicare, or state and local taxes.
- The deduction will run from 2025 through 2028.
Eligible industries will be clarified by the IRS by October 2, 2025. As with overtime, employers should continue withholding taxes normally in 2025. The W-2 will be updated in 2026 with a new reporting code (likely to be TP in Box 12, plus Box 14b). Payroll systems will need modifications to ensure tips are excluded from federal taxable income.
Again, this blog post provides more explanation for “no tax” on overtime and tips.
3. Dependent Care FSA Limit Increases
As part of the OBBB, for the first time since the 1980s, the annual limit for a dependent care flexible spending account (FSA) under IRS Section 125 will increase. This increase raises the limit from $5,000 to $7,500, taking effect in 2026.
This is welcome news for working parents and caregivers, as dependent care costs have risen significantly over the decades. Employees should still be reminded that FSAs remain “use it or lose it” and should elect amounts they realistically expect to spend.
4. Employer-Provided Childcare Tax Credit
Effective January 1, 2026, the OBBB dramatically expands the employer-provided childcare tax credit:
The maximum credit rises from $150,000 to $500,000.
The percentage of qualifying expenses covered increases from 25% to 40%.
So, what is this credit? Basically, it’s a way for businesses to get some tax relief when they help employees with childcare. This could be on-site childcare, contributions to childcare centers, or assistance for employees who use outside providers. The credit helps make offering these benefits more affordable for employers.
Because many women have left the workforce due to limited childcare options, this bigger credit could be an incentive for employers to step in. More businesses providing childcare could mean more women feel able to return to work—or stay in it—creating a win-win for employees and employers alike.
5. 1099 Reporting Threshold
Starting with payments made in 2026 (for taxes filed in 2027), the threshold for 1099 reporting will rise from $600 to $2,000. Smaller payments to contractors or vendors won’t need to be reported, which could save employers a lot of time and paperwork at year-end.
Even though it’s a simple change, it can make a big difference for businesses that work with lots of independent contractors. Employers will still need to track payments carefully, and accounting systems should be updated for the new threshold to make filing smoother and avoid mistakes on payments that do meet the $2,000 mark.
Curious why 1099s are important? Check out our blog post on 1099 reporting for all the details.
6. C-Corp Tax Advantages
The OBBB also makes C corporations (C-Corps) more appealing for small business owners in certain situations. Understanding these advantages can help employers make strategic decisions about business structure.
Key benefits:
Lower Corporate Tax Rate: C-Corps pay a flat 21% federal tax on retained earnings, compared to individual rates that can reach 37%. This is especially beneficial for businesses retaining profits for growth or future needs.
Qualified Small Business Stock (QSBS) Exclusions: Gains on stock issued after July 4, 2025, can be excluded from taxes based on holding periods: 50% after three years, 75% after four, and 100% after five. The exclusion limit increased from $10 million to $15 million per company, and the asset threshold rose from $50 million to $75 million.
Deductible Employee Benefits: C-Corps can deduct employee benefits that S-Corp owners cannot. Health insurance, life insurance, disability coverage, and educational assistance are fully deductible without creating taxable income for owner-employees.
Things to Keep in Mind:
Double Taxation: Profits distributed as dividends are taxed again at the shareholder level, which can push combined rates toward 40%.
Limited Depreciation Benefits: Rental property owners may face disadvantages due to limited depreciation benefits and higher taxes on property sales.
Tips to Implement:
Consider issuing new stock after July 4, 2025, to capture enhanced QSBS benefits.
New businesses that fit the profile may want to incorporate as C-Corps from the start.
Maintain detailed records of stock issuance, monitor QSBS thresholds, and ensure reasonable compensation for owner-employees.
These added C-Corp advantages may make this structure worth a closer look and could provide significant tax savings over time, depending on your situation.
Final Thoughts
The One Big Beautiful Bill Act (OBBB) shakes up taxes, benefits, and reporting requirements in ways that just about every employer will feel. Payroll systems will need adjustments, and keeping employees in the loop will be just as important as the numbers. With a little preparation and having the right tools in place, the transition can go a lot smoother. For businesses structured as C-Corps—or considering the switch—the new QSBS rules and other benefits could offer meaningful tax savings and more flexibility in using profits.
At the end of the day, it’s not just about staying compliant; it’s about building a workplace where both employers and employees can do their best work. As always, if you have questions about how these updates apply to your business, we’re here to help!