The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, includes a wide range of measures that will directly impact payroll tax reporting for employers, employees, and self-employed individuals. While the hospitality and restaurant industries will see notable impacts, all businesses will need to adjust their payroll reporting practices in the months ahead.
New Deductions For Tips & Overtime
The OBBBA allows new deductions of up to $25,000 per year in qualified tips and up to $12,500 per year ($25,000 for joint filers) in qualified overtime compensation from taxable income, subject to income-based phaseouts. These deductions apply retroactively from Jan. 1, 2025, and are available through the 2028 tax year.
Because these deductions are claimed directly on personal income tax returns, employees and self-employed individuals will need accurate reporting to take advantage of these benefits. Employers must enhance payroll reporting by separating qualified vs. non-qualified tips and by showing qualified overtime compensation on applicable information returns filed with the IRS (or SSA) and on statements to eligible taxpayers.
Expansion Of FICA Tip Tax Credit
The OBBBA also expands the FICA Tip Tax Credit to include beauty-related services, such as barbershops, hair and nail care, and spa treatments, not just food and beverage service occupations. The FICA Tip Tax Credit is a non-refundable general business credit that allows employers to claim credit for the employer share of FICA tax paid on certain employee tips. As a result, eligible employers will be required to gather applicable wage information to claim this valuable credit.
Additional Payroll Tax Related Provisions
Other noteworthy provisions include:
- Modifications to qualified transportation fringe benefits.
- Permanent repeal of the moving expense deduction and related gross income exclusion for most taxpayers.
- Raising the Form 1099 reporting threshold from $600 to $2,000, effective for 2026.
No Immediate Withholding Changes
On Aug. 7, 2025, the IRS released IR-2025-82, confirming that for tax year 2025, there will be no changes to Form W-2, existing Forms 1099, Form 941, or other payroll return forms. Likewise, the federal income tax withholding tables will not be updated for OBBBA-related provisions.
This phased implementation aims to prevent disruptions during the 2025 tax season, giving businesses, payroll service providers, and tax professionals ample time to adapt. However, IR-2025-82 emphasizes that the IRS is already preparing new guidance and updated forms for tax year 2026, including changes to how tips and overtime are reported. The news release goes on to say that the IRS will coordinate with employers, payroll providers, and tax professionals to ensure a smooth transition.
What Employers Should Do Now
Employers should begin working closely with payroll providers and tax professionals to ensure accurate year-end reporting, while also reviewing benefit packages and internal materials to reflect new deductions and tax changes. With the IRS expected to release additional guidance in the coming months, staying proactive and monitoring updates will be essential for a smooth transition into the 2026 tax year.
For more information on the tax implications of the OBBBA, please contact your GBQ tax advisor or a member of the GBQ employment tax services team.
By Sara Goldhardt, CPA, State & Local Tax Services
Are you searching for additional state and local tax guidance? Check out these resources:
OBBBA Provisions To Impact Real Estate, High-Net-Worth Property Owners
Property Tax 101: Understanding Your Rights, Responsibilities, & Opportunities For Tax Savings
Is Your Business Benefiting From This State Tax Strategy?
