Employment Tax

United States | Federal H.R. 1—One Big Beautiful Bill Act is signed into law, employment tax changes ahead

Summary

On July 4, 2025, President Trump signed H.R. 1—One Big Beautiful Bill Act (the “OBBBA”) into law, bringing about changes to the tax laws that will affect business and individuals, including changes to payroll tax and information reporting rules. Key provisions include changes to certain information reporting thresholds, the inclusion of deductions for qualified tips and qualified overtime which will impact employer withholding and information reporting responsibilities, the permanent inclusion of certain provisions that were set to expire under the Tax Cuts and Jobs Act (“TCJA”), and amendments to the COVID-related Employee Retention Tax Credit (“ERTC”) statute of limitations and penalty provisions.

The detail

Key provisions affecting employment taxes

Increase in certain information reporting thresholds

The OBBBA increased the information reporting threshold for payments required to be reported per Internal Revenue Code sections 6041(a) and 6041A(a)(2), and reportable payments for backup withholding under Internal Revenue Code section 3406(b)(6), from $600 to $2,000 (with inflation adjustments for calendar years after 2026). The new threshold is applicable to payments made on or after January 1, 2026.

Qualified tips and qualified overtime

Provisions applicable to both qualified tips and qualified overtime:

• Effective for taxable years beginning after December 31, 2024, and through December 31, 2028
• Federal income tax withholding tables and procedures under Internal Revenue Code section 3402(a) will be modified to take this deduction for qualified tips and qualified overtime into account for taxable years beginning after December 31, 2025
• Deduction begins to phaseout for individuals with modified adjusted gross income over $150,000 ($300,000 for married filing jointly)
• Businesses required under the OBBBA to report cash tips and/or qualified overtime for periods beginning prior to January 1, 2026 may approximate this separate accounting of amounts designated as cash tips by any reasonable method provided by the Secretary
• Specific guidance from the IRS on information reporting requirements for cash tips and qualified overtime is expected to be released

Qualified Tips: The OBBBA provides for a deduction for up to $25,000 of qualified tips received by an individual (employee or nonemployee) effective for taxable years beginning on or after January 1, 2025, if certain requirements are met. For purposes of this section, a qualified tip is a cash tip received by an individual in an occupation which traditionally and customarily received tips on or before December 31, 2024, with certain exclusions. The IRS will publish a list of such occupations by October 2, 2025.

• Form W-2 (employee) or Form 1099 (nonemployee) must include a separate accounting of amounts reasonably designated as cash tips and the occupation of the individual receiving such tips.
• For self-employed individuals (nonemployees), the deduction may not exceed the individual’s gross income from such trade or business

Qualified Overtime: The OBBBA provides a similar deduction of up to $12,500 (or $25,000 for married filing jointly) for individuals who receive qualified overtime compensation, with certain exclusions. This deduction is limited to individuals who are required to be paid overtime under Section 7 of the Fair Labor Standards Act and is applicable to pay that exceed the individuals’ regular rate of pay.

• Total amount of qualified overtime compensation must be reported on Form W-2 (separate provisions apply to individuals not treated as employees under the tax law)

COVID-related ETRC

• Limitations on COVID-related ERTC credits and refunds: Going forward, the Internal Revenue Service will not issue credits or refunds with respect to COVID-related ERTC for the third or fourth quarters of 2021 unless the claim for credit or refund was filed on or before January 31, 2024
• The OBBBA extends the of statute of limitations for assessment for the third and fourth quarters of 2021 to six (6) years after the latest of (1) the date on which the original return which includes the calendar quarter the credit is filed for, (2) the date the return is treated as filed under Internal Revenue Code section 6501(b)(2), or (3) the date on which the claim for credit or refund with respect to such credit is made.
• COVID-related ERTC promoters who failed to comply with due diligence requirements with respect to determining the eligibility for or the amount of any COVID-related ERTC must pay a penalty of $1,000 for each failure

TCJA Provisions

Certain TCJA amendments that were set to expire at the end of 2025 have become permanent. H.R.-1 extended or permanently implemented the following employment tax provisions:

• Permanently terminated the exclusion for Qualified Bicycle Commuting Reimbursements that was provided in Internal Revenue Code section 132(f)
• Permanently terminated the exclusion for Qualified Moving Expense Reimbursements that was provided under Internal Revenue Code section 132(g), and the corresponding deduction under Internal Revenue Code section 217

Other provisions impacting employment taxes

• The exclusion from an employee’s gross income for dependent care assistance provided under an employer’s dependent care assistance plan pursuant to Internal Revenue Code section 129 will increase to $7,500 ($3,750 for married filing separately) for taxable years beginning after December 31, 2025
• The exclusion for employer payments of student loans under Internal Revenue Code section 127 which was scheduled to end on December 31, 2025 has become permanent. The exclusion amount remains $5,250 through calendar year 2026, and will increase for inflation for any taxable year beginning on or after January 1, 2027
• The OBBBA creates the “Trump Account”, a federal tax-advantaged savings account that is structured like a traditional individual retirement account but is created for the benefit of a child under the age of 18
  • The OBBBA provides an exclusion from an employee’s gross income for employer contributions of up to $2,500 in the taxable year (with inflation increases for any taxable years after 2027) to the Trump account of such employee or of any dependent of such employee if the contributions are made pursuant to an employer benefit plan meeting certain requirements. This exclusion is expected to be codified in Internal Revenue Code section 128
  • The maximum annual contribution to a Trump account is limited to $5,000 (with inflation increases for any taxable years after 2027)
  • Contributions will not be accepted prior to July 4, 2026

How we can help

Vialto can assist with you understanding the new requirements under the OBBBA and implementing these changes into your business.

Contact us

For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:

Tina Schrob
Partner

Priya Schwartzburt 
Director

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