The One Big Beautiful Bill Act – Employer's Guide

Nextep blog - One Big Beautiful Bill Act OBBBA

On July 4, 2025, the U.S. President signed the One Big Beautiful Bill Act (Public Law 119-21) into law.

Since then, we at Nextep have been watching for the fine print from Washington. Here is a rundown of what is currently active law, what is retroactive, what is coming in 2026, and, importantly, what these laws mean to you as the employer.

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PART 1: ACTIVE LAW IN 2025

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EMPLOYEE TAXES

Status: Signed law & active IRS guidance

The following provisions are effective for the 2025 tax year.

+ No Tax on Tips & Overtime (Employee-Calculated for 2025)

The One Big Beautiful Bill Act (OBBBA) has eliminated federal income tax on “qualified” tips and overtime pay for tax years 2025-2028.

The first $25,000 of the calendar year’s “qualified” tips and $12,500 ($25,000 for joint filers) of earned overtime will not be subject to federal income tax.

These provisions do come with conditions for what counts as “qualified” tips and overtime – read more about that here.

Because the IRS issued guidance in November in Notice 2025-69, employers are exempt from reporting overtime and tipped wages on W-2s for 2025. To claim this deduction on their tax returns, employees can do the following:

Overtime: Employees will find their total overtime pay on their final 2025 pay stub. Divide the overtime pay by 3 to calculate the tax-free premium amount.
Tips: Employees can use the amount in Box 7 (Social Security Tips) of their standard W-2 for taxable wages that exclude tips.

Income caps: The tax benefit phases out for workers earning over $150,000 ($300,000 for married couples).

What this means to you: Paychecks will still have tax withheld as usual, but those wages will be reported on Form W-2 and exempt from federal taxes when employees file their IRS tax returns.

Please note that, unless your state has different provisions, tips and overtime pay are still fully taxable by state and local authorities. Tips and overtime wages are still subject to FICA (Social Security and Medicare) taxes.

Read our full rundown of “qualified” tax-exempt tips and overtime under OBBBA:

Qualfied Tips and Overtime

WORKFORCE & IMMIGRATION

Status: Signed law & implementation funded

The bill includes strict new immigration enforcement and fees that may impact your foreign-born workforce.

+ New Work Authorization Fees

The cost to apply for or renew work authorization has increased significantly to fund border security, including:

Initial work permit: $550
Renewal: $275
Asylum application: $100 fee for new applications and $100 annual “pay to wait” fee for unprocessed applications.

What this means to you: Many of these costs are new or have increased from $0. If you sponsor foreign-born employees or reimburse these fees, revisit your company’s budget to assess any needed changes.

+ 1% Remittance Tax

A 1% excise tax now applies to cash transfers sent outside the U.S. (remittances). Employees sending money to family abroad will see this deduction applied to their transfers.

What this means to you: The excise tax applies to the transfer, not the payroll deposit. Your employees may want to explore pay options, such as paycards and direct deposit.

+ Increased I-9 Audits

The government has allocated $170 billion+ to immigration enforcement and border security, including compliance checks and I-9 audits.

What this means to you: Companies need to prepare for more frequent audits of their I-9 forms. We can expect stricter reviews that will dig deeper into these forms, possibly utilizing AI and data analytics to assist in the process. Additionally, employers may face more severe penalties for errors and for hiring unauthorized workers.

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PART 2: RETROACTIVE LAW

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EMPLOYEE TAXES

+ SALT Deduction Increase (Retroactive)

Status: Signed law, retroactively effective January 1, 2025

OBBBA raised the State and Local Tax (SALT) deduction cap from $10,000 to $40,000, effective retroactively from January 1, 2025. Employees and owners in high-tax states (such as NY, CA, and NJ) will see a significant reduction in their 2025 tax liability.

The benefit begins to phase out for households with income above $500,000.

What this means to you: Employees may be able to deduct more money on their 2025+ state and local tax returns than before.

+ Increased Adoption Benefits

Status: Changes effective retroactively to January 1, 2025

Though employers have long been able to claim tax exemptions for qualified adoption assistance for their employees, OBBBA has made specific updates.

Employer Exclusion Permanent. Previously subject to potential expiration dates or legislative renewal, the tax exclusion for employer-provided adoption assistance is now permanent, effective January 1, 2025. Employers can continue to provide up to $17,280 (for 2025) in tax-free reimbursement to employees.
Employee Credit Becomes Partially Refundable. OBBBA changes the individual Adoption Tax Credit that employees can claim on their returns. Beginning in tax year 2025, a portion of this credit (up to $5,000) is now refundable. Employees who adopt may get cash back from the IRS for this credit, even if they do not owe federal income taxes.
Expansion of “Special Needs” Determinations. The OBBBA expands the definition of a “special needs” child for tax purposes. In addition to state agencies, Indian tribal governments’ determinations are now federally recognized, expanding eligibility.

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HEALTHCARE & BENEFITS

+ Telehealth and HSAs

Status: Was a temporary tax law; now permanent, retroactive to January 1, 2025

Previously, a High-Deductible Health Plan (HDHP) could not pay for anything that wasn’t preventive care until the participant met their deductible. If a plan covers these costs too early, the employee loses their eligibility to contribute to a Health Savings Account (HSA).

The CARES Act of 2020 provided relief, allowing a temporary safe harbor to encourage telehealth visits during the COVID-19 pandemic.

After extensions, this relief expired on December 31, 2024. When the OBBBA was signed into law in July 2025, it retroactively made the safe harbor permanent, effective January 1, 2025. HDHP plans can safely allow $0 telehealth visits without it threatening an employee’s eligibility to hold an HSA.

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PART 3: COMING IN 2026+

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HEALTHCARE & BENEFITS

+ Medicaid Work Requirements

Status: Passed, but implementation starts in 2026, and enforcement begins in 2027*

Effective 2026, physically and mentally able adults ages 19-64 who are on Medicaid must prepare to document 80 hours per month of work or community service to continue coverage.

* 2026 is mostly a transition year for this regulation, giving employees time to adjust schedules and begin recordkeeping or finding alternative coverage. Beginning in 2027, the law is enforceable. However, some states, notably Nebraska, have vowed to begin enforcing this law early.

What this means to you: Lower-wage or older employees who rely on Medicaid as a supplement may need to prove their work hours or seek employer-sponsored coverage if they lose eligibility. Employers may potentially see an increase in enrollment in the company’s medical plans during the next open enrollment.

As a reminder, employees can enroll or make changes to their benefits during the company’s annual open enrollment period or within 30 days of a federally approved qualifying event, such as gaining or losing eligibility/coverage.

+ DCA Increase

Stats: Increase effective in 2026

Beginning in 2026, parents get a boost to tax-exempt contributions to their childcare accounts. The Dependent Care Account (DCA) maximum increases from $5,000 to $7,500 for married couples filing jointly.

Nextep has already handled this change for our clients.

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PAYROLL

+ Trump Accounts

Beginning July 4, 2026, the government will contribute $1,000 to every child born with a valid Social Security number between December 1, 2025, and December 31, 2028. This money will go into an account called a “Trump Account.” It will grow without being taxed until the recipient begins withdrawing money. Each year, the account may receive up to $5,000 in contributions. No distributions are allowed until the child turns 18.

Employers may optionally contribute up to $2,500 per year to Trump Accounts for their employees’ children. Employer contributions will count against the $5,000 annual max.

+ Employer Calculation of Tips & Overtime on W-2

Employees will be responsible for finding their own tipped and overtime wages for their 2025 tax returns. But employers must ensure that W-2 forms for 2026-2028 tax years include designated places to reflect this info.

Nextep will handle this update automatically for our PEO clients.

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HR

+ Increased I-9 Audits: The Specifics

While specifics on audit procedures and the increased penalties are still forthcoming, government authorities should release additional guidance on handling the foreign-born workforce and addressing the increased I-9 audits.

In the meantime, it’s a good idea to connect with your HR Business Partner to conduct a proactive audit of your employees’ I-9s to ensure all are complete.

There’s a potential for other types of ICE enforcement with this bill. Nextep will keep you updated as details emerge. Contact your HR Business Partner when needed for guidance on a case-by-case basis.

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TAX CREDITS

+ Employer Tax Credit for Paid Family & Medical Leave

Was a temporary tax law; now permanent and revised in 2026

The Employer Credit for Paid Family and Medical Leave (Section 45S) was initially a temporary provision of the 2017 Tax Cuts and Jobs Act.

Employers who pay an employee at least 50% of their normal wages while they are on family & medical leave can claim a tax credit ranging from 12.5% to 25% of those wages. This tax cut was set to end in 2025, but is now permanent under OBBBA, with some modifications.

When calculating their tax cuts, employers now have two options, beginning in 2026:

Wages Paid, claiming credit only for actual wages paid to employees on leave
Insurance Premium Method, basing the credit on the total cost of insurance premiums paid that year.

Beginning in 2026, employers may optionally allow employees to become eligible for employer-paid leave (and employers to claim the tax credit) after 6 months of employment, rather than the standard 12. It’s important to note that this 6-month eligibility applies only to the employer payment and tax credit, not to the employee’s actual FMLA leave eligibility.

+ Employer Childcare Tax Credits

Status: Increases effective in 2026

If your company provides childcare services or contributes toward part or all of the cost, the employer’s annual maximum allowable childcare tax credit is increasing in 2026. Through 2025, employers could offset up to 25% of those qualified expenses if they offered care services and facilities tpo their employees, or up to 10% if they pay towards an employee’s childcare costs to a referred and contracted third party. The maximum tax credit they could claim in 2025 was $150,000 per year.

New in 2026, most employers can now claim up to 40% of qualified facility expenses. The credit for referral expenses remains at 10%. Their maximum annual tax credit increases to $500,000.

Small businesses get an even greater benefit of up to 50% of qualified facility expenses or 10% of referral expenses. Their maximum annual tax credit is $600,000. To qualify, they must have had annual gross receipts of $31 million or less for the preceding 5 years before the tax year. The threshold for what qualifies as “small business” for this credit will adjust with inflation.

To claim the credit, employers will complete IRS Form 8882, Credit for Employer-Provided Childcare Facilities and Services, then transfer the amount to Part III of IRS Form 3800, General Business Credit.

+ Taxable Employer Contributions to Bicycle Commuting

Status: Was a temporary tax law; now permanent in 2026

Beginning in 2026, employers can no longer claim a tax credit for their contributions to bicycle commuting. The Tax Cuts & Jobs Act of 2017 had paused this benefit from 2018 to 2025, making reimbursements taxable income. With the OBBBA, this suspension is now permanent, and any employer contributions remain taxable.

+ Employer Tax Credit for Student Loan Repayment

Status: Expands prior tax credit to include student loans, beginning 2026

While employer tuition assistance has been tax-free since the 1970s, employer payments toward employees’ student loans were treated as taxable income before 2020. The CARES Act temporarily authorized tax-free loan repayment through 2025. Under OBBBA, the employer’s tax-exempt contribution to student loans is now permanent, up to $5,250 annually.

Employers can apply this $5,250 limit to qualified student loans, tuition, books, and equipment for current coursework. The annual limit will adjust for inflation. Although these payments are tax-deductible for the employer, they won’t add to the employee’s gross income for federal tax purposes.

Organizations intending to offer this benefit should update their educational assistance plans to explicitly include student loan repayments as a qualified expense. Contact your HR Business Partner at Nextep if you need help revising your policy.

+ Moving Expense Reimbursements

Status: Was a temporary tax law; now permanent in 2026

Before the Tax Cuts and Jobs Act (TCJA), employers could reimburse an employee’s moving costs without including those costs in the employee’s taxable income. TCJA temporarily did away with that beginning in 2018, treating the covered moving expenses as increased taxable income on the employee’s W-2.

Originally set to expire, OBBBA permanently removes the employee’s tax-free exclusion for these payments, except for active-duty military and members of the intelligence community. This change is permanent for tax years beginning after December 31, 2025.

As before, employers can still claim a tax credit for their own payments for employee moving expenses. Before TCJA, employers would claim the credit as a business expense. 2018 going forward, employers claim the tax credit as a compensation expense.

+ Meal Reimbursements

Status: Was a temporary tax law; now permanent in 2026

Before 2018, employers could deduct 50% of the cost of business (client/travel) meals and 100% of employee meals, as long as they were for the company’s benefit (such as longer working hours or dinner during a late shift).

The Tax Cuts and Jobs Act (TCJA) began to phase out the tax deductions for employee meals. The TCJA included a “ticking time bomb” that would reduce the deductions to 0% on January 1, 2026. Though many were hoping to do away with that provision, it became permanent under OBBBA.

Business meals for clients or travel remain 50% deductible.

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ADDITIONAL RESOURCES

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Nextep guidance: Get even more guidance from Nextep’s experts, including FAQ, employer checklists, a timeline, and more:

OBBBA Resources

Tax guidance: See the official IRS guidance on a number of tax items affected by OBBBA.

Health care: See a rundown of health care-related items from the Association of State and Territorial Health Officials (ASTHO).

Beyond employment & PEO: The OBBBA includes many other provisions that don’t necessarily affect employment, including changes to certain tax deductions, depreciation write-offs, nutrition, rural health, Medicaid, SNAP benefits, 529 plans, and much more. For complete details on the bill and how it affects you, see the full OBBBA text.

Nextep will keep an eye on developments and update you as we hear more. Please get in touch with us with any questions along the way. Our experts are happy to help!

Legal Disclaimer

Information regarding the One Big Beautiful Bill (OBBB) is provided for informational purposes only and does not constitute tax or legal advice. Eligibility for deductions, including those referenced in IRS Notice 2025-114, depends on individual circumstances. The information provided herein is subject to revision and may not be the most current information available. Nextep strongly recommends consulting a certified tax advisor to ensure compliance and accuracy. Nextep assumes no liability for eligibility determinations or the receipt of tax credits. See IRS guidance here for more info.

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