The One Big Beautiful Bill Breakdown: Employers’ Tax Treatment of Compensation and Benefits
The One Big Beautiful Bill Act (OBBBA) updated several tax rules for compensation and benefits, adding new deductions and expanding credits for employers.
The Previous Tax Law
Overtime
Overtime has historically been taxed in the same way as regular wages, subject to federal income tax.
Tips
Tips have also been treated as regular taxable income for federal income tax purposes.
Business Meals
Employers could generally deduct 50% of the cost of meals provided to employees, such as meals served in on-site cafeterias or offered during late shifts, emergencies or business meetings. In some cases, the cost was fully deductible.
FMLA Tax Credit
Family and Medical Leave Act (FMLA) Paid Leave Tax Credit, which originated with the Tax Cuts and Jobs Act of 2017, was a temporary provision allowing employers to claim a percentage of wages paid to qualifying employees on paid leave. The credit had been extended multiple times since its inception, and it was scheduled to expire in 2025.
Employer-Provided Child Care Credit
This tax credit had allowed employers to claim up to $150,000 per year for providing certain childcare services on behalf of employees.
New and Final Law Under the One Big Beautiful Bill Act
Overtime
For tax years 2025-2028, W-2 employees can now deduct a portion of their overtime earnings from federal income, up to $12,500 for single filers or $25,000 for joint filers. This above-the-line deduction begins to phase out once income exceeds $150,000 (single) or $300,000 (joint).
Only the excess of the employee’s regular rate (the extra half-time in “time-and-a-half”) is eligible. To qualify, employees must receive “qualified overtime compensation” as defined by the Fair Labor Standards Act (FLSA). It is important that employers become familiar with the requirements of this provision as there are many eligibility rules around this provision.
The IRS has since issued guidance on reporting qualified overtime compensation. Beginning with the 2026 tax year, employers must separately report qualified overtime compensation on Form W-2, Box 12, using Code TT. Qualified overtime compensation generally includes only the overtime premium required under the FLSA and not the employee’s entire overtime payment.
Business Meals
Also, starting in 2026, employers will no longer be able to deduct the cost of meals provided for their employees’ convenience. Limited statutory exceptions remain, including certain customer-sale situations and specific offshore type settings.
Tips
Starting in 2025, tipped workers can deduct up to $25,000 in qualified tip income from their taxable earnings. It’s important to note that mandatory service charges and automatic gratuities do not qualify for this deduction. The deduction phases out for incomes above $150,000 (single) or $300,000 (joint) and lasts through 2028.
FMLA Tax Credit
The FMLA Paid Leave Tax Credit is now permanent with expanded employee eligibility, including changing the minimum employee work requirement to six months with a minimum of 20 hours per week, if elected by the employer.
Businesses no longer need to be covered by FMLA to qualify, and the credit can apply to either wages paid during leave or insurance premiums for leave coverage.
Employer-Provided Child Care Credit
Starting in 2026, the annual credit cap and eligibility requirements increase, encouraging broader use of this credit. The credit is equal to an amount of eligible expenses up to an annual credit cap.
What It Means for You
Beginning with the 2026 tax year, employers will be required to separately report qualified overtime compensation and certain tip information. The reporting requirements apply even though overtime and tips remain subject to payroll taxes.
In addition to the additional reporting, there are many changes that can affect businesses. It’s important to know how and when the OBBBA changes will affect your business. The IRS continues to release guidance on several provisions of the OBBBA, including reporting requirements for overtime and tips.
To learn more about how the One Big Beautiful Bill Act and these specific provisions may impact you, contact your Warren Averett advisor.
This article was originally published on August 14, 2026, and most recently updated on August 19, 2026.
