The One Big, Beautiful Bill Act (P.L. 119-21) partially addressed campaign promises to relieve taxes on those receiving overtime pay and tip income. Billed as “no taxes” on overtime and tips, the final version of the legislation fell short of that goal, providing limited tax benefits to those who may qualify and involving new payroll calculations and reporting requirements in the process. The tax-free portion of overtime pay is generally reduced to one- third the amount employees receive for working extra hours under the law up to a maximum amount. The benefit applies only to federal income taxes, and there are household earnings limits that could reduce the benefit amounts even more. For those receiving tip income, there also is a maximum amount of tip income that qualifies for the federal income tax benefit, and the law applies only to workers earning less than certain amounts who are in federally- designated jobs that commonly receive tips. Transition language in the law allowed the Treasury Department to relieve employers and employees for 2025 of much of the calculation and reporting burden associated with the
Also in 2026, payroll will be busier administering student loan garnishment orders, but the Education Department may not have the resources to administer that function.
benefits. But, starting in 2026, forms and calculation procedures will dictate how the limited tax on overtime and tips will be applied. These provisions expire after 2028. Other payroll-related adjustments in the tax law raised the threshold amount for required reporting of payments to contractors from $600 annually to $2,000, effective in 2026, with increases in future years applied due to inflation. A longstanding tax benefit for dependent care provision of the tax code was adjusted from $5,000 to $7,500, also in 2026, and the tax-free amount for qualified employer-paid educational assistance will rise with inflation from its current $5,250 a year cap.
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ISSUE 19 GLOBAL PAYROLL MAGAZINE
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