The Payroll Implications of the One Big Beautiful Bill Act: What We Currently Know

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, has impacted many areas of taxation, including individual, business, and payroll taxes. As of September 2025, the IRS has not yet issued final guidance on the implementation of many of the provisions of OBBBA. Below is a summary of what we do know.  

2025 Payroll Reporting  

The IRS announced on August 7, 2025, that there will be no changes to certain 2025 information returns, such as Form W-2, existing Forms 1099, and Form 941. They will provide transition relief, permitting employers to approximate a separate accounting of 2025 amounts designated as qualified overtime compensation and tips “by any reasonable method specified by the Secretary of Treasury.”   

Again, more guidance will be released by the IRS to clarify this reporting for 2025 and the following years. Draft versions of 2026 Forms W-2 and W-2c have been released.  

2025 Tax Withholding  

At this time, employers will still withhold federal income tax, Social Security, and Medicare taxes on overtime and tips, as employee taxpayers will be responsible for deducting these amounts on their individual tax returns.    

The IRS will not be revising the 2025 tax tables at this late stage of the year. However, a draft version of the 2026 Form W-4 has been released, subject to a comment period. The new W-4 is expected to provide a much more detailed worksheet to factor in many of the new deductions provided by OBBBA. Furthermore, individuals who anticipate being affected by overtime and tip income deductions, or any of the other OBBBA provisions, are encouraged to use the IRS tax estimator.  

No Tax on Overtime Rules  

Effective for 2025 through 2028, individuals who receive qualified overtime compensation may deduct the pay that exceeds their regular rate of pay (such as the “half” portion of “time-and-a-half” compensation) that is required by the Fair Labor Standards Act (FLSA) and reported on a Form W-2, Form 1099, or other specified statement furnished to the individual.   

For 2025 reporting, further guidance will be released on the proper reporting method. The maximum annual deduction is $12,500 ($25,000 for joint filers). The deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers). Taxpayers must include their Social Security number on the return and file jointly if married to claim the deduction.  

No Tax on Tips Rules  

The preliminary information available states that “qualified tips” are voluntary cash or charged tips received from customers or through tip sharing.  The maximum annual deduction is $25,000. For those self-employed, the deduction may not exceed the individual’s net income (without regard to this deduction) from the trade or business in which the tips were earned.    

The list of qualifying industries is not yet finalized, and the reporting method for 2025 has not been announced. This deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers). This deduction is available for both itemizing and non-itemizing taxpayers.  Again, taxpayers must include their Social Security number on the return and file jointly if married, to claim the deduction.  

Changes to 1099-MISC and 1099-NEC  

Beginning with payments made in 2026, the OBBBA increases the reporting threshold for reporting on Forms 1099-MISC, Miscellaneous Information, and Forms 1099-NEC, Nonemployee Compensation, from $600 to $2,000 and will be subject to inflation adjustments beginning in 2027.  

Work with the Experts at Maner Costerisan for More Information  

As more information is released by the IRS and other governing bodies, Maner Costerisan will continue to monitor the announcements and inform you when changes are released. The IRS Newsroom will also provide updates.   

To hear more or ask your own questions, join our upcoming Year-End Payroll Webinar, where we will be discussing year-end and 2026 payroll taxes and informational reporting. Register today by clicking the banner below.