How the One Big Beautiful Bill Act Impacts Pennsylvania Employers

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, is a significant piece of federal legislation that brings a number of changes impacting employers, particularly regarding wage and tax policies. While the law is federal, its provisions directly affect how Pennsylvania employers manage payroll, taxes, and employee benefits. Here's a breakdown of the key changes and what you should be doing to prepare.

Effective Dates of Key Provisions

Many of the OBBBA's employment-related changes are already in effect for the 2025 tax year, with others phasing in over the next few years. The most critical provisions for employers to note are:

Retroactive to January 1, 2025:

The act establishes new income tax deductions for "qualified tips" and "qualified overtime wages."

Effective January 1, 2026:

The tax credit for paid family and medical leave becomes more generous, and the annual limit for employer-provided educational assistance programs will be indexed for inflation.

Tax Deductions for Tips and Overtime

The OBBBA creates new, temporary tax deductions for employees, which, in turn, create new reporting requirements for employers.

Qualified Overtime Wages:

Employees can now deduct up to $12,500 ($25,000 for a joint return) of qualified overtime wages through the end of 2028. The deduction is available for hours worked over the 40-hour workweek, and the IRS has instructed employers to separately report this information on employee Form W-2s.

Qualified Tips:

Similarly, employees in tipped occupations can deduct up to $25,000 of qualified tips. “Qualified tips” means tips paid in cash, by credit card, or through tip sharing. Tips must be voluntary in the customer’s discretion, and cannot be required gratuities, mandatory service charges, and non-cash tips.  The IRS is expected to publish a list of covered occupations, but it's likely to include roles like servers, bartenders, and delivery drivers. Employers must also separately report this tip income on W-2s.

For the 2025 tax year, employers may use a reasonable approximation to report these amounts. However, the IRS is expected to update withholding procedures for 2026 to account for these deductions.  Employers must continue to withhold on all tips and overtime compensation. W-2s will be required to state the employee’s total amount of qualified overtime compensation to reduce their federal income tax on overtime premiums, the employee must claim the tax deduction on their individual tax return. Overtime and tip compensation is still subject to Social Security, Medicare, state, and local taxes.

Paid Family Medical Leave Tax Credit

The OBBBA makes permanent and expands the tax credits employers may take for payments for Paid Family and Medical Leave (PFML) which were first allowed under the TCJA temporarily. Starting in 2026, to qualify for the tax credit, employers must pay employees with 6 months of service and who are employed 20 hours per week at least 50% of their normal wage while on leave for 2-12 weeks per year.

• Employers may still choose to offer PFML except in states where it is mandatory. In states with mandatory PFML, employers may now get a tax credit for paid leave that exceeds the mandated state amount. Costs may be offset with credits up to a percentage of wages covered. Employers who provide PFML under an insurance policy may now get a tax credit for a percentage of the benefit applied against total premiums paid.

• The amount of the tax credit is 12.5% on 50% of wages or premiums and is increased by .25% for each percentage point of wages paid over 50% up to a maximum of 25%.

Employers must have a written PFML policy which must cover all employees and provide qualifying employees with a minimum of two weeks of PFML. Employers will be required to track employees’ leaves carefully because in the event of an audit, the IRS will require proof of policy, tracking, and payments.

Permanent Telehealth and Educational Assistance Benefits

The act also makes permanent some temporary benefits that were set to expire. This provides long-term clarity for employers offering these benefits to their workforce.

Telehealth Services:

High-deductible health plans can now permanently cover telehealth services before a plan participant meets their annual deductible.

Student Loan Repayment:

The OBBBA permanently extends the ability for employers to provide up to $5,250 per year in tax-free educational assistance for student loan repayments. The limit for this benefit will be indexed for inflation starting in 2026.

The IRS is required to publish guidance, so employers should check for updates at www.irs.gov on the OBBBA page. The first guidance published on July 14 described some of the new tax breaks. On August 7, the IRS announced that W-2s and other forms will not be changed for 2025 and these changes will be made in 2026. On August 15, the IRS published a draft W-2 for 2026. By October 2, the IRS is supposed to publish a list of occupations that as of December 2024 customarily and regularly received tips.

Dependent Care Flexible Spending Accounts

Employees may contribute pre-tax amounts for childcare and related expenses (i.e., summer camps). The OBBBA increases the cap from $2,500 to $3,750 for employees filing separately and from $5,000 to $7,500 for employees filing jointly. As another potential perk, employers should consider whether to offer this benefit or whether to increase the cap if they already offer it, and work with their Plan Administrator to communicate changes during open enrollment.

Recommended Actions for Pennsylvania Employers

With these changes in motion, it's crucial for employers to take proactive steps to ensure compliance and avoid potential penalties.

1. Update Payroll Systems:

Ensure your payroll software can separately track and report "qualified overtime wages" and "qualified tips." This is a new and mandatory requirement for W-2 forms starting in 2025.

2. Review Employee Benefits:

If you offer educational assistance or high-deductible health plans, review your current policies to align with the OBBBA's permanent extensions.  Employers also may need to decide whether to offer certain benefits that may be ways to provide additional non-taxable income to employees as explained below. These benefits could be viewed as perks and incorporated into recruitment and retention strategies. Employers who want to offer them must develop written policies by January 1, 2026. Employers should look to Brokers and Plan Administrators for assistance with the written policies and communications to employees. You may want to communicate these permanent benefits to your employees.

3. Consult with a Professional:

Given the complexity of these federal tax law changes, it's highly recommended that you consult with your payroll provider, accountant, or one of Fiffik Law Group’s employment law attorneys to confirm your systems and practices are compliant. Staying on top of these changes isn't just a matter of legal compliance; it's also an opportunity to communicate valuable benefits to your employees.