The Big Beautiful Bill new guidance to ensure payroll compliance for US organizations
President Trump’s “Big Beautiful Bill” was signed into law on July 4th. A sweeping package affecting tax, spending and entitlements, its passage made headlines worldwide. But while politicians and pundits debate its potential political implications, US organizations need to understand the bill’s real-world impact on operations, especially regarding payroll: What actions need to be undertaken? What adjustments need to be made?
Fundamentally, the bill rewrites how businesses manage compensation and reporting, from changes in employee tax deductions to permanent business income advantages. While some provisions may only affect an individual’s annual tax returns, other provisions will need to be implemented through payroll systems.
Below, we’ll break down some of the key areas impacted and provide suggested actions to ensure your payroll operations remain up-to-date and fully compliant.
Payroll Tax Deductions for Tipped and Overtime Workers
The provision that has, perhaps, made the most headlines allows employees to deduct up to $12,500 in qualified overtime compensation and up to $25,000 in qualified tips on their annual tax returns.
While this tax break primarily impacts individual employees and their annual tax filings, it’s important for employers to adjust their payroll system’s year end statements and communications accordingly.
Keep in mind these changes do not apply to Social Security (FICA) or Medicare withholding, only income tax.
Extension and Enhancement of Reduced Tax Rates
In 2017, the Tax Cuts and Jobs Act (TCJA) lowered individual tax brackets and reduced marginal tax rates for middle-income taxpayers through 2025. The new bill makes these rate modifications permanent. It also adds an additional year of inflation adjustment for certain brackets.
Extension and Enhancement of the Standard Deduction
The increased basic standard deduction for single filers, heads of household and joint filers or surviving spouses, originally set by the TCJA in 2017, has been extended through 2030 and slightly enhanced. For any taxable year before 2029, the basic standard deduction will be $15,750 for single filers, $23,625 for heads of household, and $31,500 for joint filers or surviving spouses.
Although this is an individual employee-level benefit, it does affect employee withholding elections and can potentially reduce the need for itemized deductions. It also has the potential to simplify financial planning for your workforce.
Termination of Deduction for Personal Exemptions
The bill permanently eliminates personal exemptions, which allowed taxpayers to reduce taxable income based on household size, extending another TCJA provision that was set to expire in 2025.
Eliminating personal exemptions means W-4 forms must remain focused on the standard deduction and credits rather than exemptions per dependent. Like other provisions, this is designed to simplify payroll withholding.
Fringe Benefits & Moving Expenses
Extending another provision originally set by the TCJA, any qualified bicycle commuting reimbursement or qualified moving expense reimbursement will not be considered qualified fringe benefits and will continue to be included in taxable income. The new bill makes this provision permanent.
These changes directly impact taxable compensation reporting.
Recommended actions
To ensure your payroll processes remain up-to-date and compliant, organizations may wish to:
Report tips and overtime
According to the IRS, employers must file information returns with the IRS (or SSA) and furnish statements to taxpayers showing the total amount of qualified overtime compensation paid during the year and certain cash tips received, as well as the occupation of the tip recipient.
Upgrade payroll software
Companies may need to add fields/codes to track deductible overtime and tip earnings and exclude qualified bicycle commuting or moving reimbursements from taxable income . Ensure your withholding formulas reflect the new lower rates and new deduction thresholds are reflected in pay check estimations.
Review federal withholding forms
As with any life or tax related changes, employees should be reminded to update their federal withholding W-4 forms to avoid being over/under-withheld throughout the year.
Train payroll staff
Ensure your payroll teams have a full understanding of how these deductions impact federal withholding and reporting. Consider working with a partner to supplement gaps in knowledge.
Provide employees with guidance
Make sure employees are clearly and comprehensively informed about these deductions and how they work when filing taxes. Provide clear and concise FAQ documents to help avoid confusion.
Update reimbursement policies
Make sure your policies align with new eligibility rules.
Keeping your payroll current and compliant
While US organizations will need to make some changes to their payroll procedures as a result of the Big Beautiful Bill, it’s important to note that these system updates will need to be implemented for 2026. The IRS is taking a phased approach to these changes, meaning no changes to returns or withholding tables related to the new law will need to be implemented for Tax Year 2025.
Similarly, remember that these changes only impact federal taxes, not state. While some states might follow the bill and implement the provisions on a state level individually, others may not. It’s important to stay up-to-date and informed about your local tax laws.
As previously mentioned, the new bill’s withholding provisions do not affect Social Security and Medicare withholding, which will remain the same.
To help organizations meet the new requirements, payroll systems providers such as Workday, SAP and Oracle are reviewing the bill and are in the process of releasing information to offer guidance and support.
Companies seeking further or more detailed information can consult the Department of the Treasury, the Internal Revenue Service, or other agencies who are engaged in ongoing efforts to provide guidance and clarity regarding the implementation of the new bill’s provisions.
Strada, as always, will continue working closely with our partners and customers to ensure their payroll operations remain accurate, efficient and compliant .