If you have employees, pay attention to the changes made by One Big Beautiful Bill Act (OBBBA) with respect to staffing. Will these changes lead you to making changes in your business practices and policies? As you read what follows, pay attention to effective dates; some changes apply to 2025 while others begin in 2026.
No tax on tips or overtime payments
The new law creates deductions for employees who receive tips or overtime pay. This change is not a direct one for employers; it affects employees’ personal tax returns. The new law does not alter current rules on income tax withholding or FICA.
What’s new for employers: You must report tips and overtime payments on employees W-2s. More specifically, tips must be separately identified on the form. Overtime payments must be shown on their own line on the W-2. For 2025 overtime payments, employers can approximate this amount. It’s not clear whether the IRS will revise the W-2 for 2025, but it’s probable this will be done for 2026 to create new lines and codes for reporting tips and overtime payments. Be sure your payroll system begins to segregate these payments to make it easier for tax reporting purposes.
Changes in withholding. Employees who can benefit from these new deductions on their tax returns may want to change their income tax withholding. This is done on Form W-4. As an employer, you must implement the withholding changes by the first payroll period ending on or after 30 days from the date you receive the form.
Family and medical leave credit
While federal law doesn’t require any paid family and medical leave, employers with at least 50 employees must give unpaid leave. Some states have paid leave requirements. There’s a federal tax credit incentivizing employers to offer paid leave. The credit was set to expire at the end of 2025, but has been made permanent…and it’s been enhanced.
Starting in 2026 (not for 2025 returns), the credit can be claimed even if paid leave is required by state or local law. Some employers carry insurance to cover family and medical leave, and now the credit can be based on the insurance premiums (but no deduction can be taken for premiums used for credit purposes).
Employer credit for FICA on tips
Employers can take a tax credit for their share of FICA on tips in excess of the amount needed to bring their wages up to $7.25 per hour. Until now, this tax break applied only to employers in the food and beverage industry. The new law extends this break to employers in the beauty service industry, such as spas, barber shops, hair salons, and nail salons. This change is retroactive to the start of 2025.
Credit for employer-provided childcare
There’s been a credit for employers that offer childcare services in their facilities, and not many small businesses can afford this employee fringe benefit. Nonetheless, those that can do so may be helped financially through an enhanced tax credit that begins in 2026.
The credit rate for 2025 is 25%. It increases in 2026 to 40%…but it’s 50% for small employers. A small employer is a business meeting the gross receipts test, which for 2025 means having average annual gross receipts in the 3 prior years not exceeding $31 million.
The credit is limited in 2025 to $150,000. But starting in 2026, it jumps to $500,000…$600,000 for small employers.
Employee benefits
Small businesses may be able to offer certain fringe benefits that are tax free to employees but deductible by employers. The new law makes the following changes:
- Dependent care assistance plans in 2026 for employers covering employees’ dependent care costs increased to $7,500 (up from $5,000 in 2025). This also applies to dependent care FSAs funded by employees.
- Educational assistance plans can permanently cover student loan repayment up to the applicable dollar limit. This dollar limit is $5,250 in 2025, but will be adjusted for inflation starting in 2026.
- Bicycle commuting, which was a tax-favored benefit before 2018 and was supposed be revived starting in 2026, has been permanently eliminated. Employers that reimburse employees for bicycle commuting treat this as taxable compensation.
- Moving expenses for employees in the private sector could be covered by employers tax free before 2018 and was supposed to get that tax treatment again in 2026. The new law permanently ends this tax-free treatment. But tax-free treatment continues for members of the military and, due to the new law, members of the intelligence community.
- Employee retention credit ended in 2021, but as of April 2025, there were still about a half million refund claims outstanding with respect to this credit. The new law bars refunds or credits if the claims for them were filed after January 31, 2024. What’s more the IRS now has more time—6 years—to audit perceived erroneous or fraudulent claims.
The work opportunity credit for hiring individuals from certain targeted groups ends on December 31, 2025. It was not extended or made permanent.
Final thought
The new law creates some opportunities for small businesses in a financial position to take advantage of them. Review your employee benefit offerings as well as your payroll practices to determine where changes can or should be made. Discuss your situation with your tax adviser to ensure you comply with new law changes and avoid missing out on tax savings where possible.
You can read more concerning employee benefits for small businesses in this list of blogs.
