On July 4th, the President signed into law the “One Big Beautiful Bill Act” (BBB), a massive budget reconciliation measure aimed at providing major tax cuts, stimulating the economy, expanding funding for defense and border protection, cutting certain social welfare programs, and raising the national debt ceiling. At nearly 900 pages, there’s a lot to digest. What follows is our interpretation of key provisions as they relate to employers.
Tax Cuts for Employees and Employers
As we understand it, these deductions are temporary, starting in 2025 and expiring after the 2028 tax year.
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Overtime Wages:
Employees who earn “qualified overtime” can deduct up to $12,500 for single filers or $25,000 for joint filers. Qualified overtime is defined under the Fair Labor Standards Act (FLSA). These deductions phase out for employees earning over $150,000 (single) or $300,000 (joint). Our understanding is that employers will need to track qualified overtime separately and report it on W-2s, although tax withholding procedures remain unchanged. -
Tipped Wages:
Employees can deduct up to $25,000 in “qualified tips” received in jobs that customarily receive tips prior to December 31, 2024. This deduction also phases out based on gross income. It appears that employers must continue reporting tips separately on W-2s, consistent with current requirements. -
1099 Contractors:
The reporting threshold for payments to independent contractors increases from $600 to $2,000. (Are your 1099 employees misclassified? We talk about that here.)
Changes to Benefits Programs
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Dependent Care FSAs:
Maximum contributions increase from $2,500 to $3,750 for single filers and $5,000 to $7,500 for joint filers. Employers are not required to adopt the new maximum, but doing so may enhance employee benefits. From our perspective, if employers choose to increase limits, plan documents should be updated with the plan administrator. -
Paid Family and Medical Leave (PFML):
Tax credits for PFML are now permanent. The employment period for eligibility is reduced from 12 months to 6 months, with a minimum of 20 hours/week worked. Employers required to provide leave under state/local laws can still claim credits for leave provided beyond those requirements. In our reading, the bill offers two calculation methods for the credit:-
As a percentage of wages paid to qualified employees during leave.
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As a percentage of total premiums paid or incurred for insurance covering PFML, regardless of whether leave was used.
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Telehealth Services:
Employers can continue to offer telehealth under HDHPs without imposing a deductible for employees or eligible dependents. -
Employer Student Loan Payments:
The tax exclusion for employer contributions toward student loans up to $5,250/year is now permanent. Inflation adjustments begin after the 2026 tax year. Employers should update payroll and accounting systems accordingly. -
Relocation Expenses:
The temporary elimination of moving expense deductions and tax-free employer reimbursements (from the 2017 Tax Cuts and Jobs Act) is now permanent.
Immigration Compliance
The BBB provides significant funding for ICE, which likely means:
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More frequent and rigorous I-9 audits.
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Increased scrutiny of hiring and retention practices for foreign workers.
Our recommendation, based on this understanding, is that employers should conduct thorough I-9 audits, ensure all staff completing I-9 forms are trained, and consider using the Federal E-Verify system if not already doing so.
Final Thoughts
The Big Beautiful Bill introduces substantial changes that directly impact employers, from tax deductions and benefits program enhancements to stricter immigration compliance requirements. From our perspective, employers who proactively update policies, train staff, and adjust payroll systems will be better positioned to leverage the benefits while maintaining compliance.
This is a complex, evolving area. Our intent here is to share our understanding and interpretation, not legal or tax advice. We encourage employers to consult directly with legal, tax, or benefits professionals to determine how these provisions apply to their specific situation.
