How the One Big Beautiful Bill Act reshapes payroll, compliance, and workforce strategy for 2025
The One Big Beautiful Bill Act (H.R. 1) became law on July 4, 2025, introducing significant changes to federal tax policy that directly impact how employers manage payroll, calculate deductions, and structure employee benefits. With some provisions effective retroactively to January 1, 2025, employers across the country are working to understand what these changes mean for their workforce management strategies.
While the Treasury Department and IRS continue developing implementation guidance, employers can start preparing for these changes now. Here’s what business leaders need to know about the key provisions and their implications for workforce planning.
New Tax Benefits for Employee Overtime
One of the most significant changes involves how overtime compensation is treated for federal income tax purposes. The Act creates a new deduction for qualified overtime pay that could benefit both employers and employees.
What Qualifies as Deductible Overtime
The legislation allows employees to deduct qualified overtime from their federal income taxes for tax years 2025 through 2028. This deduction applies regardless of whether employees itemize deductions or take the standard deduction.
Key limitations include:
- Maximum deduction of $12,500 per year (or $25,000 for married couples filing jointly)
- Only applies to overtime payments required under the Fair Labor Standards Act (FLSA)
- Deduction phases out when modified adjusted gross income exceeds $150,000 for individuals or $300,000 for married couples filing jointly
Important distinction: Only the premium portion of overtime pay qualifies for the deduction. For example, if an employee earns $20 per hour for regular time and $30 per hour for overtime, only the $10 premium portion is eligible for the tax benefit.
Implementation Challenges for Employers
The retroactive effective date creates immediate compliance considerations. Employers need to track and report qualified overtime compensation separately on Form W-2, though the IRS hasn’t yet specified which reporting box will be used.
For 2025, employers can use “any reasonable method” to estimate qualified overtime amounts, but this transition rule requires careful documentation and may need adjustment once final guidance emerges. The Treasury Department is expected to provide clearer implementation guidance within the next few weeks to help employers navigate this transition period.
Permanent Federal Tax Rate Changes
The Act makes permanent several tax provisions that were originally set to expire, providing more predictability for long-term workforce planning.
Standard Deduction and Tax Rate Stability
Tax rates and standard deduction amounts that have been in effect since 2018 are now permanent fixtures of the federal tax code. Additionally, the Act introduces a temporary $6,000 annual deduction through 2028 for taxpayers aged 65 or older. This additional deduction is separate from the standard deduction and applies to all taxpayers 65 and older regardless of income level.
This permanence helps employers with multi-year compensation planning and benefits design, particularly for organizations with significant numbers of older workers who may benefit from the additional deduction.
State and Local Tax Deduction Changes
The federal cap on state and local tax (SALT) deductions temporarily increases from $10,000 to $40,000 starting in 2025, with inflation adjustments through 2029. This change primarily affects employees in high-tax states such as New York, California, and New Jersey where state and local taxes often exceed the previous $10,000 cap, potentially influencing talent acquisition strategies for companies competing for skilled workers in these markets.
Employee Benefits Modifications
The Act permanently eliminates certain employee benefits that were previously suspended, requiring employers to review and potentially restructure their benefits offerings.
Transportation Benefits
The $20 monthly tax-free bicycle commuting reimbursement benefit, suspended since 2018, is now permanently eliminated. However, other qualified transportation fringe benefits receive an additional year of inflation adjustment, providing some offset for employers managing commuter benefits programs.
Moving Expense Reimbursements
Both employee tax-free moving expense reimbursements and employer deductions for moving expenses are permanently eliminated. This change affects companies that relocate employees or recruit talent requiring relocation assistance.
Employers should review their relocation policies and consider how these changes impact their ability to attract talent requiring geographic moves.
Planning Considerations for Employers
Immediate Action Items
Payroll System Updates: Work with payroll providers to ensure systems can track and report qualified overtime separately. This may require software updates or process changes.
Policy Reviews: Examine current overtime policies and employee benefits packages to identify areas affected by the new legislation.
Communication Planning: Prepare to educate employees about new tax benefits and changes to existing benefits programs.
Workforce Strategy Implications
Overtime Management: The new tax benefits for overtime may make employees more willing to work overtime hours, as they’ll keep more of their premium pay after taxes, potentially impacting workforce scheduling strategies.
Benefits Design: With certain benefits permanently eliminated, employers may need to find alternative ways to support employee needs, particularly around commuting and relocation.
Compliance Monitoring: The retroactive implementation and ongoing guidance development require enhanced compliance monitoring systems.
Managing Complexity in Implementation
The combination of retroactive effective dates, pending guidance, and varying state tax treatments creates a complex compliance environment. Many employers are turning to workforce solution providers for guidance on implementation strategies and ongoing compliance monitoring.
Professional employer organizations (PEOs), employer of record (EOR) providers, and other workforce solution providers can help businesses navigate these changes by handling payroll system updates, tax reporting requirements, and compliance monitoring while employers focus on their core business operations.
Looking Ahead
As the Treasury Department and IRS develop implementation guidance over the coming weeks, employers should prepare for potential adjustments to initial compliance approaches. The temporary nature of some provisions also requires consideration of how these changes fit into longer-term workforce planning strategies. Employers should expect final guidance on W-2 reporting requirements and reasonable estimation methods by early August 2025.
Businesses with complex workforce arrangements, multi-state operations, or significant overtime requirements may find particular value in partnering with compliance experts who specialize in navigating evolving employment legislation.
The One Big Beautiful Bill Act represents a significant shift in federal tax policy affecting workforce management. While the immediate implementation challenges are substantial, the changes also create opportunities for strategic workforce planning and enhanced employee benefits. Employers who proactively address these changes while staying informed about developing guidance will be best positioned to leverage these new provisions effectively.
