President Signs Reconciliation Bill Into Law

On July 4, President Trump signed House Resolution 1, the One Big Beautiful Bill Act (OBBBA), into law [H.R. 1]. On July 3, the U.S. House of Representatives had narrowly passed the Senate version of H.R. 1 by a vote of 218-214.

Provisions Affecting Payroll

The OBBBA contains several provisions that will affect payroll. Here are highlights from Title VII, Subtitle A, regarding taxes:

• Permanent extension of the Tax Cuts and Jobs Act (TCJA; Chapter 1). Text for most provisions from the TCJA law has changed from “2018 through 2025” to “beginning after 2017” to indicate there is no expiration date on December 31, 2025.
• No tax on tips (Chapter 2, §70201). The legislation provides a temporary elimination of federal taxation on qualified tips through a deduction on an individual’s tax return. Employers will still deduct payroll taxes.

The legislation provides eligible individuals a deduction “of an amount equal to the qualified tips received during the taxable year” up to $25,000. The amount allowed as a deduction will be reduced by $100 for each $1,000 an individual earns above $150,000 ($300,000 for joint filers). The deduction is retroactive to January 1, 2025, and expires on December 31, 2028.

• No tax on overtime (Chapter 2, §70202). The legislation provides a temporary exemption of federal taxation of overtime pay. The exemption would apply only to the overtime premium. The legislation establishes a deduction, subject to certain limitations, equal to the “qualified overtime compensation received during the taxable year” up to $12,500 ($25,000 for joint filers). The amount allowed as a deduction will be reduced by $100 for each $1,000 an individual earns above $150,000 ($300,000 for joint filers).

The legislation also includes a requirement to report overtime compensation on Form W-2, Wage and Tax Statement. This provision is retroactive to January 1, 2025, and expires on December 31, 2028.

• Increase in Form 1099-MISC and Form 1099-NEC reporting threshold from $600 to $2,000 (Chapter 4, Subchapter D, §70433). This provision is effective beginning with payments made in 2026. The threshold is also subject to inflation adjustments beginning in 2027.

Detailed Analysis

For detailed analysis of how OBBBA will affect payroll, see “OBBBA Provisions Will Affect Payroll” in Issue 7 of Payroll Currently (July 11, 2025).

To learn how the OBBBA will affect your year-end processing and to prepare for changes in 2026, plan to attend one of PayrollOrg’s Preparing for Year-End programs this fall. This seminar provides updates on the latest changes in legislation and regulations that affect the close of 2025 and the first payroll of 2026.

Curtis E. Tatum, Esq., is In-House Counsel and Senior Director of Federal Payroll Resources for PayrollOrg.