OBBBA: Payroll & Tax Implications
On July 4, 2025, the One Big Beautiful Bill Act (OBBBA) was signed into law, enacting significant changes to federal tax and payroll law. The Act extends several provisions from the Tax Cuts and Jobs Act (TCJA) and introduces new deductions, credits, and compliance requirements that will affect your payroll operations, employee benefits, and tax reporting obligations.
To help you navigate these changes, we’ve summarized the most relevant payroll-related provisions below, including effective dates and Internal Revenue Code (IRC) references.
| Summary of Key Payroll-Related Provisions | ||||
| Act Section | IRC Code Sec. | Provision | Summary of Change | Effective Date |
| Sec. 70101 | Code Sec. 1(j) | Extension and enhancement of reduced rates | Permanently extends lower individual income tax rate brackets originally enacted under TCJA | Taxable years starting after Dec. 31, 2025 |
| Sec. 70102 | Code Sec. 63(c) | Extension and enhancement of increased standard deduction | Permanently extends the increased standard deduction and continues indexing it for inflation | Taxable years starting after Dec. 31, 2025 |
| Sec. 70103 | Code Sec. 151(d)(3) | Termination of deduction for personal exemptions other than temporary senior deduction | Permanently repeals personal exemptions and introduces a new temporary additional standard deduction for seniors age 65 and older | Taxable years starting after Dec. 31, 2024 |
| Sec. 70112 | Code Sec. 132(f) | Extension and modification of qualified transportation fringe benefits | Eliminates exclusion for bicycle commuting reimbursements and simplifies the structure of qualified transportation fringe benefits, while continuing to allow pre-tax treatment for transit and parking. | Taxable years starting after Dec. 31, 2025 |
| Sec. 70113 | Code Sec. 217(k) | Extension and modification of limitation on deduction and exclusion for moving expenses | Extends suspension of moving expense deduction and exclusion for most taxpayers, while continuing eligibility for active-duty military and newly adding members of intelligence community who relocate due to job assignments | Taxable years starting after Dec. 31, 2025 |
| Sec. 70201 | New Code Sec. 224 | No Tax on Tips | Temporarily allows employees to deduct up to $25,000 annually in qualified tip income from their taxable wages, reducing income subject to withholding and requiring employers to report tip amounts on Form W-2 | Taxable years starting after Dec. 31, 2024 (reporting prior to Jan. 1, 2026 may be approximated by reasonable method specified by Treasury Secretary) |
| Sec. 70202 | New Code Sec. 225 | No tax on overtime | Temporarily allows employees to deduct up to $12,500 in qualified overtime pay from taxable income, reducing withholding amounts and requiring employers to report overtime separately on Form W-2 | Taxable years starting after Dec. 31, 2024 (reporting prior to Jan. 1, 2026 may be approximated by reasonable method specified by Treasury Secretary) |
| Sec. 70304 | Code Sec. 45S | Extension and enhancement of paid family and medical leave credit | Makes the paid family and medical leave credit permanent, expands it to include insurance premium payments, and clarifies coordination with state and local leave programs | Taxable years starting after Dec. 31, 2025 |
| Sec. 70402 | Code Sec. 23(a) | Enhancement of adoption credit | Increases the annual exclusion for employer-provided dependent care assistance from $5,000 to $7,500 ($2,500 to $3,750 for married individuals filing separately) | Taxable years starting after Dec. 31, 2024 |
| Sec. 70404 | Code Sec. 129 | Enhancement of the dependent care assistance program | Increases the annual exclusion for employer-provided dependent care assistance from $5,000 to $7,500 ($2,500 to $3,750 for married individuals filing separately) | Taxable years starting after Dec. 31, 2025 |
| Sec. 70412 | Code Sec. 127 | Exclusion for employer payments of student loans | Makes permanent the exclusion from income for employer-paid student loan assistance up to $5,250 per year and adds an annual inflation adjustment | Taxable years starting after Dec. 31, 2025 |
| Sec. 70433 | Code Sec. 6041(a) | Increase in threshold for requiring information reporting with respect to certain payees | Raises the threshold for information reporting under Code Sec. 6041 from $600 to $2,000, indexes it for inflation starting in 2027, and aligns related reporting and backup withholding rules accordingly | Taxable years starting after Dec. 31, 2025 |
| Sec. 70603 | Code Sec. 162(m) | Excessive employee remuneration from controlled group members and allocation of deduction | Applies $1M deduction cap to all members of a controlled group; affects payroll for highly compensated employees. | Taxable years starting after Dec. 31, 2025 |
| Sec. 70605 | Code Sec. 3134, Code Sec. 3131, Code Sec. 3132 | Enforcement provisions with respect to COVID-related employee retention credits | Imposes new penalties and enforcement measures for improper claims of COVID-related employee retention credits (ERCs), prohibits new claims after January 31, 2024 | After date of enactment (July 4, 2025) |
| Sec. 71301-71305 | Code Sec. 36B | Permitting premium tax credit only for certain individuals; eliminating limitation on recapture of advance payment of premium tax credit | Tighten eligibility for the Affordable Care Act (ACA) premium tax credit by restricting it to U.S. citizens and certain eligible noncitizens, enhancing income and identity verification, and eliminating limitation on recapturing excess advance payments. | Changes phased in between 2025 and 2027 |
Recommended Employer Actions
- Update Payroll Systems: Adjust withholding tables and tax calculations for 2026 and beyond. Implement new W-2 reporting fields for tips and overtime deductions.
- Review Benefit Offerings: Evaluate dependent care, student loan repayment, and child care programs. Coordinate with benefit providers to ensure compliance with new limits and credits.
- Communicate with Employees: Inform employees about new deductions (tips, overtime) and benefit changes. Update onboarding and open enrollment materials accordingly.
- Coordinate with Tax Advisors: Confirm eligibility for credits (e.g., Paid Leave, Child Care). Review documentation and compliance for ERC and executive compensation rules.
- Monitor IRS Guidance: Stay alert for IRS implementation rules and clarifications. Track effective dates for payroll-related provisions.
We are committed to helping you understand these changes and ensure your payroll operations remain compliant and efficient. Please contact us with any questions or to schedule a consultation.
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