How the One Big Beautiful Bill Changes Payroll: An Overview for Small Businesses
OCTOBER 22, 2025
In July 2025, Congress passed the One Big Beautiful Bill (OBBB), bringing many tax and payroll changes that will affect employers and employees alike. As a small business with under 50 employees, it's critical to understand the parts that touch payroll, so your compliance and systems stay on track.
Key Payroll-Related Changes
Here are the main changes you should be aware of now:
Change | What It Means for Employers / Payroll | Effective Date / Notes |
“No tax on overtime / tips” deductions | Eligible employees will be able to deduct from their taxable income a portion of overtime pay and tips. Payroll systems must track these amounts separately. | Retroactive to January 1, 2025; in force through 2028 (before reexamination) |
New reporting & classification needs | You may need to flag/track which tipped roles to qualify, manage withholding adjustments, and produce new or modified reporting. | Guidance from Treasury / IRS still forthcoming (Payroll.org flags open questions) |
Employer tax credits & benefits | OBBB expands or makes permanent certain credits (for paid leave, employer childcare, etc.). As of 2026, employer childcare credit increases and dependent care FSA limits go up. | Many start January 1, 2026. |
What You Should Do First (Now)
- Audit your current payroll system – check whether it can record separate “qualified tip / overtime deduction” fields or be updated to do so.
- Tag or identify employees in tip-eligible roles (e.g. servers, bartenders) and track their gross tip amounts.
- Stay alert for IRS / Treasury guidance — many specifics are not yet fully clarified. Payroll.org keeps track of many open questions.
- Run payroll previews / simulations once vendor updates are available to confirm correct withholding and reporting.
In our next blog, we’ll dive deeper into exactly how to handle “no tax on overtime / tips” deductions in payroll, with examples and best practices. Stay tuned and contact Payroll Vault at (303) 806-0276 in the meantime with any questions!
