Congress passed and President Trump signed the One Big Beautiful Bill Act into law on July 4, 2025. This Act makes numerous changes to tax and spending policies—many of which directly impact employers. The Act is far from clear in various respects, and we continue to wait for IRS commentary and guidance.
But if you don’t have time to read the roughly 1,000-page Act or want to wait for further guidance, don’t worry. Here are some of the highlights of the Act that will impact many employers.
No Tax on Tips (Temporary)*
Between 2025-2028, certain employees and self-employed individuals may deduct “qualified” tips on their federal returns, subject to specific limits. Employers may also reduce the amount of business income taxes they pay by the amount they pay in the employer share of Social Security and Medicare taxes on qualified tips.
Keep in mind:
- Only applies to “qualified” tips, or cash tips received by an individual in a job which customarily and regularly receives tips (think servers, bartenders, hotel staff, etc.; however, federal guidance is needed to fully understand which jobs “customarily” or “regularly” receive tips).
- There is a maximum annual deduction of $25,000 for employees. For self-employed individuals, the deduction may not exceed the individual’s net income from the job from which the tips were earned.
- Deduction phases out for taxpayers with modified adjusted gross incomes over $150,000 ($300,000 for joint filers).
- Tips remain subject to other existing federal/state payroll and income tax requirements.
No Tax on Overtime (Temporary)*
Between 2025-2028, the Act similarly allows for certain individuals receiving qualified overtime compensation to deduct that compensation on their federal return, subject to limits.
Keep in mind:
- Only applies to “qualified overtime compensation,” or overtime compensation paid to an individual as required by the Fair Labor Standards Act (FLSA).
- There is a maximum annual deduction of $12,500 ($25,000 for joint filers).
- Deduction phases out for taxpayers with modified adjusted gross incomes over $150,000 ($300,000 for joint filers).
- Tips remain subject to other existing federal/state payroll and income tax requirements.
*The IRS has been directed to revise any tax forms or withholding procedures to accommodate the overtime (and tip) deductions, and will also provide guidance soon.
Medicaid Eligibility
The Act creates stricter work requirements for Medicaid eligibility, with individuals aged 19-64 being required to work/engage in qualifying activities (job training, education, community service, etc.) for at least 80 hours per month, unless they fall under an exemption (having dependent children, medical conditions, etc.).
Increase to Dependent Care Flexible Spending Account (FSA) Contribution Limit
Beginning in 2026, the dependent care FSA contribution cap increases from $2,500 to $3,750 for an employee filing a federal income tax return separately from his or her spouse, and $5,000 to $7,500 for joint filers.
Permanent Paid Family and Medical Leave Credit
Beginning in 2026, employers may elect a non-refundable credit amount of either: (a) the percentage of wages paid to qualifying employees on family and medical leave; or (b) the percentage of premiums paid or incurred for family or medical leave insurance.
Keep in mind:
- Employers must offer at least two weeks of paid family and medical leave to eligible, full-time employees (20 hours/week for at least 6 months) to qualify.
- Employers must pay 50% or more of their workforce their regular rate during the course of their leave to qualify.
- The maximum credit amount is $500,000 ($600,000 for businesses generating $29 million in revenue over the last 5 years).
- Employers required by state or local law to provide paid family or medical leave may also receive credit for paid leave, if above the required amounts.
- Employees need not be on formal FMLA leave for this credit to be available to an employer; any period of family and medical leave would be eligible.
Research & Development (R&D) Expenses
The Act allows employers of small businesses (annual gross receipts of less than $31 million) to once again deduct all R&D expenses in the year they are spent.
Keep in mind:
- Effective for tax years after December 31, 2024.
- For research performed abroad, costs remain subject to capitalization and amortization over a 15-year period.
- Expenses previously amortized under the 2022 change (removed business’ right to deduct R&D expenses in the year incurred) but not fully deducted may be deducted on the following year’s return.
Permanent Tuition and Student Loan Reimbursement
Beginning in 2026, the Act makes permanent and subject to inflation adjustment the $5,250 federal income tax exclusion for payments made under an educational assistance program.
HSA Changes (Telehealth Services and Direct Primary Care Arrangements Eligibility)
The Act makes two notable changes to Health Savings Accounts (HSAs). First of all, it permanently allows high-deductible health plans (HDHPs) to cover telehealth or other remote care services without a deductible and still qualify for an HSA. Secondly, beginning in 2026, direct primary care service arrangements (providing access to certain primary care services for a fixed monthly amount) do not disqualify coverage for HSA eligibility.
Keep in mind:
- For the change to direct primary care service arrangement treatment, HSA membership fee may not exceed $150 per month for an individual or $300 per month for a family.
Childcare Tax Credits
The Act both increases the employer-provided tax credit up to $500,000 or 40% of the employer’s qualified healthcare expenses and makes permanent employer childcare tax credits.
Legal Support for Employers Navigating the OBBB
While these are some changes employers should be aware of, this list is not exhaustive and other provisions of the Act also have implications for private employers. To read the Act in its entirety, click here.
To learn more about how FLB’s Labor and Employment attorneys can help you and/or your business understand and adapt to the Act’s changes or other challenges, check out our Employment Law and Labor Relations practice group page.
