After much congressional debate and many revisions, the One Big Beautiful Bill Act (OBBBA) was officially signed into law by President Donald Trump on July 4, 2025. Though the act will certainly impact many citizens individually, it will also affect employers when it comes to offering benefits, managing payroll, calculating taxes, complying with immigration laws, and administering paid leave.
Do you have concerns about what lies ahead for your organization? Find out what you need to know to begin preparing for the changes coming in 2026.
How the OBBBA Will Impact Employee Benefits
The OBBBA includes several changes that may alter how you offer and manage benefits. These provisions aim to help employers provide robust benefits for their workforce while making work-life balance more feasible for employees.
Health Savings Accounts
The OBBBA makes permanent a pandemic-era change, allowing employers to offer telehealth services before the deductible is met for employees who have high-deductible health plans and health savings accounts. Previously, these services were reserved for employees who had met their full deductibles.
Dependent Care Flexible Spending Accounts
The maximum pre-tax amount that employees can set aside each year for dependent care will rise from $5,000 to $7,500 ($3,750 each for those married and filing separately). The employer-provided childcare credit will rise to $500,000, an increase of $350,000. The maximum credit for small businesses has been increased to $600,000.
Under the OBBBA, employers can claim up to 40% (50% for small businesses) of qualifying expenses related to childcare, such as operating a daycare facility or training childcare employees.
Fringe Benefits
Employers should update their benefits policies to reflect the fact that moving expense reimbursements can no longer be excluded from employees’ taxable income. However, the OBBBA does allow exclusions for student loan discharges due to death or permanent disability to continue.
Impacts on Payroll and Taxes
Provisions in the OBBBA will have a significant impact on your payroll practices and tax calculations.
Taxes on Overtime Pay
The OBBBA allows for a $12,500 deduction for overtime pay. For every $1,000 that employees make over $150,000, the deduction will be reduced by $100.
This deduction applies only to the overtime premium required under the Fair Labor Standards Act. Employers are required to separately report this figure on the employee’s Form W-2.
Taxes on Service Tips
Employees will also be able to deduct up to $25,000 for qualifying tips. While this provision will apply to those under tip-sharing arrangements, it will not apply to mandatory tips or fees charged automatically by an establishment. Additionally, it applies only within industries where tipping is a typical practice.
Threshold for Reporting Independent Contractor Payments
Starting in 2026, the reporting threshold for payments to contractors who receive a Form 1099 will be raised from $600 to $2,000. While this may reduce your administrative burden for reporting payments, it will also require you to update your payroll software accordingly.
Other Notable Provisions
Employer-provided student loan payments of up to $5,250 can be excluded from the employee’s gross income. This provision was made permanent by the OBBBA.
While the OBBBA eliminates the tax deduction for employer-provided meals, the final version of the act retains the tax deduction for bicycle commuting reimbursements.
Under the OBBBA, the adoption credit now includes a refundable portion of up to $5,000. Even if an employee’s tax bill is reduced to zero, they may still receive a refund due to this enhancement to the adoption tax credit.
Immigration Provisions
The OBBBA includes a number of provisions meant to bolster the effectiveness of Immigration and Customs Enforcement (ICE). This includes funding to hire 10,000 new agents and financial support for the 287(g) program that allows ICE to partner with local law enforcement agencies.
Some experts believe this expanded funding could have a significant impact on I-9 audits. Since you may face additional scrutiny, consider making extra efforts to ensure that all related paperwork is accurate, up- to- date, and in line with immigration laws.
Paid Family and Medical Leave
The OBBBA allows for the continuation of the employer credit for paid family and medical leave. However, employers now have more flexibility on how they calculate it.
Employers may calculate the credit either as a percentage of wages paid to employees during their leave or as a percentage of premium payments for insurance policies that include paid leave coverage. Additionally, employees who have been on the payroll for six months may be counted as qualifying employees, provided they meet all other criteria.
Preparation Remains Key for Success
The OBBBA will have a significant impact on employers and their HR departments. To maintain compliance, you must understand the changes required of your business and be prepared to retool practices to ensure alignment.
Fortunately, VirgilHR keeps employers up- to- date with legislative changes. Schedule a demo today to learn how we can provide the help you need to pivot your policies accordingly.
Sources:
1. https://www.congress.gov/bill/119th-congress/house-bill/1/text
