The One Big Beautiful Bill Act (OBBBA) includes a number of tax law changes that affect employers. Here are 10 key provisions employers need to understand to ensure compliance with their federal tax and reporting obligations and to minimize taxes when providing employee benefits.
For 2025 through 2028, the OBBBA introduces new deductions for qualified tips income and qualified overtime income. These breaks are federal income tax write-offs, not exclusions. So federal payroll taxes and applicable federal income tax withholding rules still apply. Also, tips income and overtime income may still be fully taxable for state and local income tax purposes. It's critical for employers to properly report the amounts to eligible workers so they can claim their rightful federal income tax deductions for tips and overtime.
In August 2025, the IRS announced that, for tax year 2025, no OBBBA-related changes will be made to federal information returns for individuals, federal payroll tax returns or federal income tax withholding tables. So, the 2025 versions of Form W-2, Forms 1099, Form 941 and other payroll-related forms and returns won't change. Nonetheless, employers must track qualified tips income and qualified overtime income for 2025 retroactively to include amounts paid before July 4, 2025, when the OBBBA was enacted.
Additionally, in September 2025, the IRS released proposed regulations that include a list of nearly 70 occupations that are eligible for the OBBBA deduction for qualified tips income. Eligible occupations are given a three-digit code to be used by employers for information return purposes. Contact your tax advisor for details on what constitutes qualified tips income and qualified overtime income.
Dependent care Flexible Spending Accounts (FSAs) allow employees to make pre-tax contributions through payroll withholding to help cover eligible expenses. FSA contributions reduce employees' income tax and payroll taxes and employers' payroll taxes. Withdrawals used to pay qualified expenses are tax-free. These include expenses to care for a child under age 13 or other dependents unable to care for themselves due to physical or mental limitations.
Starting in 2026, the OBBBA increases the maximum annual amount that can be received tax-free under an employer-sponsored dependent care assistance program, including FSA arrangements. The limit will increase from $5,000 ($2,500 if the employee uses married filing separately status) to $7,500 ($3,750 if the employee uses married filing separately status).
The Tax Cuts and Jobs Act (TCJA) created a tax credit for paid family and medical leave. Credit amounts range from 12.5% to 25% of eligible wages paid to qualifying employees for up to 12 weeks of paid leave. To claim the credit, an eligible employer must establish a written policy that allows qualifying full-time employees at least two weeks of family and medical leave annually, as well as a pro rata amount of such leave for eligible part-time employees. In addition, the employer must pay employees at least 50% of normal wages during the leave.
The OBBBA makes permanent the employer credit for paid family and medical leave. Before the new law, the credit was scheduled to expire after 2025.
In addition, for tax years beginning with 2026, the OBBBA brings an important insurance-related enhancement. That is, rather than claiming the credit for wages paid to eligible employees on qualified leave, employers may claim the credit for a percentage of insurance premiums paid or incurred during the tax year for active family and medical leave coverage. The credit percentages remain the same, ranging from 12.5% to 25% of premiums paid or incurred.
Important: You must choose between claiming the credit for wages or premiums paid. You can't claim both. Also, any tax credit claimed for qualifying leave insurance premiums reduces your organization's tax deduction for those premiums.
The new law also modifies how qualifying employees are defined. Contact your tax advisor to learn more.
Under Section 45F of the tax code, an employer can claim a tax credit for eligible expenses paid or incurred for providing child care to employees. Through 2025, the credit is equal to 25% of qualified expenses, plus 10% of eligible resource and referral expenses, up to a $150,000 maximum.
Qualified expenses can generally take one of three forms. The rules define them as amounts paid or incurred to:
Important: Qualified child care expenses exclude amounts that exceed the fair market value of providing such care.
Starting in 2026, the OBBBA increases the percentage of qualified child care expenses for purposes of claiming the credit from 25% to 40%. The maximum credit is increased from $150,000 to $500,000. For qualifying small businesses, the credit equals 50% of eligible expenses up to a maximum of $600,000. After 2026, these amounts will be adjusted annually for inflation. To qualify, a small business must have average annual gross receipts for the previous five tax years below an inflation-adjusted threshold. For 2026, the threshold is $32 million.
Important: Starting in 2026, the new law allows eligible small businesses to pool their resources to provide child care for their employees and to use third-party intermediaries to facilitate child care services.
Employer-sponsored Section 127 educational assistance plans can make tax-free payments or reimbursements to cover a participating employee's principal and interest on any qualified education loan. The provision allowing tax-free payments to cover student loans had been scheduled to expire after 2025, but the OBBBA permanently extends it for 2026 and beyond.
The $5,250 annual limit on tax-free Sec. 127 plan benefits has been set in stone for many years. Under the OBBBA provision, inflation adjustments will be made to the annual limit starting in 2027.
To be eligible for contributions to a tax-favored Health Saving Account (HSA), an employee must be covered by a high-deductible health plan (HDHP). Effective for plan years beginning in 2025 and beyond, the OBBBA allows HDHPs to offer pre-deductible (first-dollar) coverage for telehealth services.
Starting in 2026, the new law further expands eligibility for HSAs. First, it will allow HSAs to cover eligible Direct Primary Care (DPC) arrangements. The DPC arrangement must provide only primary care services through a primary care practitioner and charge no more than $150 per month for individual coverage or $300 per month for family coverage. These amounts will be adjusted annually for inflation.
Under the OBBBA, an employer can set up a Trump Account contribution program. Starting on July 4, 2026, the employer can then contribute up to $2,500 annually to a Trump Account set up for an eligible employee or an eligible employee's dependent. The annual contribution limit will be adjusted for inflation starting in 2028. Employer contributions are tax-free to the employee or dependent. And because these contributions are excluded from the recipient's gross income, they're not subject to payroll taxes.
A Trump Account contribution program is a written plan established for the exclusive benefit of employees to make contributions to Trump Accounts of under-age-18 employees or under-age-18 dependents of employees. The plan's contributions can't discriminate in favor of highly compensated employees or their dependents.
Employers often offer relocation benefits to ease the financial, logistical and mental-health strain of moving for new hires. For 2018 through 2025, the TCJA generally disallowed tax-free treatment for employer payments to cover employee moving expenses. An exception has been available for employees who are active-duty military members.
The OBBBA makes this unfavorable provision permanent for 2026 and beyond. As a result, payments for relocation expenses are deductible for the employer but taxable to the employee, similar to how bonuses are treated. However, the new law adds another exception for "intelligence community members."
Commuting expenses to and from a place of business and home aren't generally deductible. However, employer-provided qualified transportation fringe benefits can be excluded from the employee's gross income.
For 2026 and beyond, the OBBBA makes permanent the TCJA provision that through 2025 eliminated employer deductions for providing employees with tax-free qualified transportation fringe benefits, including parking allowances and transit passes. The monthly limitation on these tax-free benefits is $325 for 2025 and $340 for 2026.
In addition, the new law makes permanent the TCJA's suspension of the exclusion of employer-provided qualified bicycle commuting reimbursements from an employee's gross income.
Businesses generally must report payments made during the year that equal or exceed the reporting threshold for:
Similarly, recipients of business services generally must report payments they made during the year for services rendered that equal or exceed the statutory threshold. This information is reported on information returns, including Forms W-2, Forms 1099-MISC and Forms 1099-NEC.
Currently, the reporting threshold amount is $600. For payments made after 2025, the OBBBA increases the threshold to $2,000, with inflation adjustments for payments made after 2026. This favorable change will take effect with information returns that should be filed in early 2027 to report affected 2026 payments.
The OBBBA ushers in numerous tax law changes that affect employers — some taking effect right away in 2025, others starting next year. With the IRS still issuing guidance on many of these provisions, compliance remains a moving target.
Employers should monitor IRS announcements closely, review their payroll and benefits systems, and consult with their tax advisors to stay current as IRS guidance is issued. Careful tracking now can help your organization avoid compliance missteps and make the most of new tax-saving opportunities.