The 2025 Big Beautiful Bill Act Explained: Key Payroll and HR Impacts for Employers

On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (H.R. 1) into law. This legislation introduces several important tax changes that directly affect payroll, HR, and business operations. From new tax deductions for tips and overtime pay to a major update in 1099 reporting requirements, employers need to understand how these provisions will impact them starting in 2025 and beyond.

We’ve summarized the most relevant updates for HR and payroll professionals. Let’s break down what this new law means for you.

Table of Contents

• Key Payroll and HR Updates in the Big Beautiful Bill Act
• What Employers Should Do Now
• Why This Matters for Businesses
• Frequently Asked Questions about the Big Beautiful Act (FAQs)
  

Key Payroll and HR Updates in the Big Beautiful Bill Act

1. Temporary Federal Deduction for Tips

• Employees may now deduct up to $25,000 in qualified tips from their federal income tax.
• This only applies to jobs that “customarily receive tips” (the IRS will publish a list).
• Employers will still deduct payroll taxes on these tips.
• The deduction phases out for incomes over $150,000 ($300,000 for joint filers).
• The deduction is reduced by $100 for every $1,000 earned above the phaseout threshold.
• It’s retroactive to January 1, 2025 and expires on December 31, 2028.

This provision provides tax relief for workers in industries like hospitality, food service, and personal care. Employers should expect employees to have more questions about how tips are taxed on paychecks and W-2 forms.

2. New Overtime Pay Deduction

• Workers can now deduct up to $12,500 in eligible overtime pay per year ($25,000 for joint filers).
• This only applies to the premium “and-a-half” portion of overtime pay; regular wages and tips don’t count. For example, if a worker makes $20 an hour, the $10 overtime premium per extra hour worked is deductible, not the full $30.
• Like the tip deduction, this also phases out above $150,000 ($300,000 for joint filers). The deduction is reduced by $100 for every $1,000 earned above $150,000 ($300,000 for joint filers).
• Employers will need to report overtime pay separately on Form W-2.
• Like the tip deduction, it’s retroactive to January 1, 2025 and expires on December 31, 2028.

This change is designed to benefit employees who consistently work overtime, particularly in healthcare, retail, and manufacturing.

 3. Higher Reporting Threshold for 1099 Forms

• Starting with payments made in 2026, the Form 1099-NEC and 1099-MISC threshold increases from $600 to $2,000 per contractor per year.
• This change will reduce 1099 filings for many businesses as this update significantly reduces reporting requirements for businesses that frequently work with independent contractors.
• The threshold will be indexed for inflation starting in 2027.

Employers who rely on gig workers and contractors should adjust their record-keeping and payroll processes ahead of this change.

What Employers Should Do Now

1. Update Payroll Systems – Make sure your payroll software is prepared to separate out tip income and overtime premiums for reporting. 

2. Educate Employees – Workers will want to understand how these deductions affect their paychecks and tax returns. HR teams should be ready with resources.

3. Plan for Contractor Reporting – Review contractor payments to determine how the new 1099 thresholds will affect your business in 2026.

Why This Matters for Businesses

The Big Beautiful Bill is positioned as a middle-class tax relief measure, but it has direct implications for HR and payroll teams. Employers will carry new responsibilities for reporting overtime and tip deductions correctly. Inaccurate filings could lead to IRS penalties.

Partnering with the right payroll technology helps to reduce manual workloads. 

You May Be Interested In

• The Overtime Deduction Act: New 2025 Tax Break for Overtime Workers
  
  
• A Closer Look at the New Federal Tax Deduction for Tipped Employees
  
  

Frequently Asked Questions about the Big Beautiful Bill (OBBBA)

©2025 - Content on this blog is intended to provide helpful, general information. Because laws and regulations evolve, please consult an HR professional or legal expert for guidance specific to your situation.