OBBBA’s Impact on Employers
What the One Big Beautiful Bill Act Means for Employers: Key Takeaways
On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBBA) into law—a sweeping piece of legislation with significant implications for both employers and employees. We’ve combed through the lengthy bill to break down the most important provisions impacting American businesses.
Here’s what you need to know:
🕒 Overtime Pay Tax Deduction
Eligible workers can now deduct up to $12,500 of overtime pay per year (or $25,000 for joint filers).
Quick refresher: Under the Fair Labor Standards Act (FLSA), overtime must be paid at 1.5x the regular rate for hours worked over 40 in a week.
Important details:
Only qualified overtime under the FLSA is eligible.
Custom agreements or state-based overtime laws don’t qualify.
High-income earners are phased out starting at $150,000 AGI (or $300,000 for joint filers), with the deduction reduced by $100 per $1,000 over the threshold.
Taxpayers must include their Social Security number(s) on the return.
Applies to tax years: 2025–2028
What employers need to do: Maintain accurate overtime records to ensure compliance and help employees claim the deduction.
💵 Tips Tax Deduction
The OBBBA introduces a new deduction for qualified tips—up to $25,000 annually.
To qualify, tips must be:
Voluntary and paid by the customer (not a service charge).
Not subject to negotiation.
Potentially received via tip pooling.
Earned in eligible industries (excludes professions like law, finance, healthcare, and the arts).
Received by a worker employed and regularly tipped before Dec. 31, 2024.
Other requirements:
The deduction phases out above the same AGI thresholds as overtime.
Self-employed individuals can claim the deduction, capped at their gross income.
SSNs must be included on the tax return.
Applies to tax years: 2025–2028
What employers need to do: Follow new reporting rules and keep detailed tip records.
🔬 R&D Expense Deduction Restored
The OBBBA reinstates immediate expensing for U.S.-based research and development (R&D) costs.
What’s changed:
For R&D performed in the U.S., businesses can now fully deduct expenses in the year incurred.
Foreign R&D expenses must still be amortized over 15 years.
Small businesses (less than $31M in average annual gross receipts) can apply this retroactively to 2022–2024 via amended returns.
What employers need to do: Accurately track where R&D occurs and consult a tax advisor to amend prior returns if eligible.
🏥 Health Savings & Dependent Care Changes
New HSA and FSA provisions:
Bronze and Catastrophic exchange plans are now HSA-eligible.
HSA funds (up to $150/month individual, $300/month family) can go toward direct primary care.
The telehealth HSA exception is extended.
Dependent Care FSA limit increased to $7,500, up from $5,000—the first change since the 1980s.
What employers need to do: Update benefits materials and educate employees about the new limits.
👨👩👧👦 Paid Family and Medical Leave Credit
The tax credit for providing paid family and medical leave has been expanded and enhanced.
Here’s how it works:
Credit = 40% of qualifying wages paid (or 50% for small businesses).
Applies to employers who:
Offer at least 2 weeks of paid leave.
Pay at least 50% of employee wages during leave.
Have a formal policy in place.
Cap: $500,000 (or $600,000 for small businesses).
Effective starting after Dec. 31, 2025.
What employers need to do: Document your leave policy and maintain detailed records.
👶 Child Tax Credit Increase
The Child Tax Credit increases to $2,200 per child starting in tax year 2025.
The refundable portion increases to $1,700.
Applies to children under 17 with valid SSNs.
🎓 Student Loan Repayment Benefit
A previously temporary benefit is now permanent: Employers can contribute up to $5,250/year toward an employee’s student loans—tax-free for both parties.
What employers need to do: If you're not offering this benefit, consider adding it to your compensation package.
📈 Other Business-Friendly Provisions
Pass-through income deduction: Made permanent.
Interest deduction rules: The pre-2022 definition of adjusted taxable income is restored, allowing more generous deductions.
Business property expensing: The annual Section 179 limit increases to $2.5 million, with the phaseout threshold raised to $4 million.
Final Thoughts
The OBBBA is a game-changing bill with big implications for employers. While this summary hits the highlights that impact businesses the most, it doesn’t cover every detail.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Level Books assumes no liability for actions taken in reliance upon the information contained herein.
