Here's What The 'One Big Beautiful' Bill Means For Employees And Employers

Whether you work for the federal government or whether you work for a private employer, the "One Big Beautiful Bill" (OBBB) will likely impact you. If you are an employer, the bill affects you too.

WHAT'S IN THE BILL

The "OBBB" as it's called, passed by the U.S. Senate and House of Representatives and signed into law by President Donald J. Trump on July 4, 2025 as Public Law 199-21, includes significant for employees and employers related relates to payroll, taxes, and employee benefits. Some key provisions are effective retroactively as of Jan. 1, 2025.

Some provisions of the bill are more ambiguous, and the Department of the Treasury and the IRS are expected to issue regulatory guidance to clarify how certain they will be implemented. But there are certain provisions employees and employers alike should be immediately aware of.

Specifically, as related to employment matters, the bill includes provisions tax deductions for tips, and hourly employees who earn overtime.

NO TAX ON TIPS

Though the OBBB has been promoted as promising "no tax on tips," it does not automatically eliminate all taxes on tips. Rather, it allows certain individuals earning less than $150,000 to deduct up to $25,000 of qualified tips from their taxable income.

According to the Internal Revenue Service (IRS), effective 2025 through 2028, employees and self-employed individuals may deduct "qualified tips" received in occupations that are listed by the IRS as customarily and regularly receiving tips on or before December 31, 2024, and that are reported on a Form W-2, Form 1099, or other specified statement furnished to the individual or reported directly by the individual on Form 4137.

By October 2, 2025, the IRS will publish a list of occupations that "customarily and regularly" received tips as of December 31, 2024. "Qualified tips" are voluntary cash or charged tips received either directly from customers or indirectly through a tip-sharing arrangement. Again, the maximum annual deduction is $25,000. For those who are self-employed, the deduction may not exceed the individual's net income from the trade or business in which the tips were earned. The deduction does not apply to taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).

The tip deduction is available to taxpayers who take the standard deduction as well as those who itemize their deductions. However, those who work for a Specified Service Trade or Business (SSTB) under section 199A (including those who are self-employed in a SSTB) are not eligible.

To claim the deduction, taxpayers must include their Social Security number on the return and file jointly if married. In addition, employers and other payors must file information returns with the IRS (or SSA) and furnish statements to taxpayers showing certain cash tips received and the occupation of the tip recipient.

Further, the IRS has indicated that it will provide transition relief for tax year 2025 for taxpayers claiming the deduction and for employers and payors subject to the new reporting requirements.

NO TAX ON OVERTIME

Likewise, the OBBB does not automatically eliminate all taxes on overtime pay. Rather, it allows certain individuals earning less than $150,000 to deduct up to $12,000 of qualifying overtime pay from their taxable income.

The IRS states that, effective 2025 through 2028, employees who receive "qualified overtime compensation" may deduct overtime premiums that are reported on a Form W-2, Form 1099, or other specified statement furnished to the individual.

Importantly, the deduction does not apply to any regular pay an employee earns for working overtime—it only applies to the overtime premium—that is, the additional "half" portion of the time-and-a-half that is required for work over 40 hours in a workweek under the Fair Labor Standards Act.

Again, the maximum annual deduction is $12,500 ($25,000 for joint filers), and the deduction does not apply to taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers). The deduction is available for both itemizing and non-itemizing taxpayers. To claim the deduction, taxpayers must include their Social Security number on the return and file jointly if married.

In addition, employers and other payors are required to file information returns with the IRS (or SSA) and furnish statements to taxpayers showing the total amount of qualified overtime compensation paid during the year.

NEW DEDUCTION FOR SENIORS

There is also provides a temporary seniors deduction, of $6,000 deduction through the year 2028 for taxpayers who are 65 and older who earn $75,000 or less. This decision is in addition to other deductions, and is capped at $6,000 ($12,000 for married couples filing jointly if both spouses qualify). It does not apply to those with a modified adjusted gross income over $75,000 ($150,000 for joint filers).

TAX CUTS AND JOBS ACT

The OBBB also makes permanent certain changes to federal tax rates and standard deduction amounts that were enacted in in the Tax Cuts and Jobs Act (TCJA), effective since Jan. 1, 2018. Most notably, the standard deduction will increase for the 2025 tax year and adjust for inflation each subsequent year.

SALT DEDUCTION

The SALT (State and Local Tax) deduction, which has been part of the U.S. tax code for over a century allows eligible taxpayers to reduce their federal tax liability by deducting certain state and local taxes from their taxable income.

For individuals, the SALT deduction is capped at $10,000 ($5,000 for married taxpayers filing a separate return), and generally, income taxes paid or accrued in carrying on a trade or business or an income-producing activity are subject to the individual state and local tax (SALT) cap. The SALT cap is set to expire for taxable years beginning after Dec. 31, 2025.

The OBBB temporarily raises the federal cap on the SALT deduction from $10,000 to $40,000 beginning in 2025, with inflation adjustments through 2029, but the cap reverts back to to $10,000 in 2030. For those with modified adjusted gross above $500,000 in 2025, the limit on a taxpayer's deduction may decrease, but not below $10,000.

BUSINESS TAXES

Under the OBBB, businesses may immediately deduct domestic research and development (R&D) expenditures after Dec. 31, 2024. However, R&D conducted outside the U.S. must continue to be capitalized and amortized over 15 years.

Additionally, small business taxpayers with average annual gross receipts of $31 million or less will generally be permitted to apply the deduction retroactively to taxable years beginning after Dec. 31, 2021. Taxpayers that made domestic R&D expenditures after Dec. 31, 2021, and before Jan. 1, 2025, are permitted to accelerate the remaining deductions for those expenditures over a one-year or two-year period.

EMPLOYEE RETENTION TAX CREDIT (ERTC)

The OBBB retroactively ends the Employee Retention Tax Credit (ERTC) program for third and fourth quarter of 2021 for claims that were filed after Jan. 31, 2024, effectively codifying, for those quarters, the current IRS ERTC processing moratorium. While businesses are not eligible to claim any Q3 and Q4 2021 claims filed after that date, claims from those quarters that were filed before Jan. 31, 2024, will still be processed. Claims from prior quarters are unaffected by the Act.

ENHANCEMENT OF EMPLOYER-PROVIDED CHILDCARE CREDIT

Currently, the Employer-Provided Childcare Credit provides businesses with a nonrefundable tax credit of up to $150,000 per year on up to 25% of qualified childcare expenses provided to employees. Therefore, an employer must spend at least $600,000 on childcare-related expenses to receive the full credit.

The OBBB permanently raises the maximum credit from $150,000 to $500,000 and increases the percentage of childcare expenses covered from 25% to 40% of qualified expenses (for example, amounts incurred in constructing a childcare facility or training childcare employees). To claim the full amount, a business must spend at least $1.25 million on childcare services.

Eligible small businesses benefit further as the maximum credit increases to $600,000 with and the percentage covered increases to 50%. An eligible small business is one that meets the gross receipts test of less than or equal to $25 million (inflation adjusted) based on the 5-year period (rather than the 3-year period) preceding the taxable year. In 2025, the small business gross receipts threshold is $31 million.

Additionally, the Act allows small businesses to pool their resources to provide childcare to their employees and for businesses to use a third-party intermediary to facilitate childcare services on the business's behalf.

It is expected both the IRS the U.S. Treasury Department will issue guidance on what is considered "reasonable methods" to address the retroactive period for the new tax deductions, as well as guidance on any changes in tax forms, instructions and processes for treatment of the deductions for prospective tax years, through 2028, in the near future.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.