Compensation and Benefit Provisions of the Big Beautiful Bill Act

By Connor Smart July 17, 2025

Note:  This article is one of many that BNN is publishing to cover the tax features of the so-called “Big Beautiful Bill.”  Each one is authored by one of BNN’s own tax professionals.  Our coverage includes a summary article that briefly describes many of the bill’s features and many more that are deeper dives into specific areas of interest to our clients.  A topical list of those in-depth articles may be found at the front of our summary article.

The Tax Cuts and Jobs Act (TCJA), one of the most sweeping and complex federal tax bills, was signed into law in December 2017.   Not to be outdone by itself, the second Trump Administration, through a series of warp speed drafting edits and voting marathons in the House and Senate, has passed the One Big Beautiful Bill Act (BBB), a massive piece of spending and budget legislation that also touches upon dozens of tax regulations.

This article focuses specifically on its impact on compensation and employee benefits. This area alone spans topics from payroll reporting to retirement plans to health savings accounts. Rather than a deep dive, this piece offers a broad overview of key changes. As always, we recommend that readers contact qualified professionals to assist with planning for these new rules, as the BBB’s application will vary based on individual circumstances.

1099 REPORTING REQUIREMENTS:

Beginning in 2026, the BBB will increase the filing thresholds for Forms 1099-K, 1099-NEC, and 1099-MISC.  In general, these changes, by increasing the filing threshold, will likely decrease the administrative burden of complying with the various 1099 filing requirements.

To summarize:

• For payments made after December 31, 2025, increase the threshold for non-employee compensation and other payments on either Form 1099-NEC or 1099-MISC, respectively, from $600 to $2,000.
• Starting in 2027, the 1099-NEC and 1099-MIC filing threshold will also be indexed for inflation, rather than be a fixed annual amount.
• For payments made after December 31, 2025, the threshold for 1099-K reporting for third-party processors will also increase, requiring more than $20,000 and more than 200 transactions, per year, per payee.

Editorial comment: the changes to both the 1099-NEC/MISC and 1099-K filing requirements have been long sought after by industry professionals and their trade groups. While the 1099-NEC/MISC threshold increase expands the level of transactions before a 1099 filing is required, the Form 1099-K changes, though less frequently discussed, could be more significant for certain taxpayers. Without the BBB 1099-K changes, the filing threshold for Forms 1099-K was set to actually decrease over time, eventually down to $600 in 2026 and beyond, as required by the American Rescue Plan Act. Given the volume and variety of payments that can go through a single digital payment platform, such as Venmo or PayPal, the increase of the dollar-threshold from $600 to $20,000 for filings, as well as the 200 transaction threshold, should help ease the burden of reporting digital payments for many taxpayers, especially those working in the “gig economy.”

COMPENSATION AND PAYROLL

No Taxes on Tipped Income

This topic has been in the zeitgeist for a while now, with both Joe Biden and Donald Trump endorsing an end to taxes on tip income during their respective 2024 presidential campaigns. Beginning in tax year 2025 and sunsetting after 2028, the BBB allows qualifying individuals a deduction of up to $25,000 for qualifying tips received in traditional tipping occupations.  The BBB implements a phase-out whereby the tip deduction is reduced by $100 for each $1,000 by which the taxpayer’s modified adjusted gross income exceeds $150,000 (or $300,000 for a joint return). This means that the tipped income exclusion is totally disallowed once modified income reaches $275,000 ($550,000 for joint filers).

The bill instructs Treasury to publish a list of professions that traditionally and customarily receive tips. Employers should begin preparing to update their 2025 Form W-2 reporting processes, and where applicable, Forms 1099, to include information on qualified tips and the occupation in which those tips were earned, pending IRS guidance. New withholding procedures reflecting the deduction are anticipated for calendar year 2026.

Taxes on Overtime Wages

The BBB also introduces new Section 225 of the Internal Revenue Code, which allows a deduction for qualified overtime compensation. For purposes of this deduction, only the overtime “premium” required under Section 7 of the Fair Labor Standards Act qualifies as “qualified overtime compensation.” In other words, this means that the entirety of overtime pay is not excludable from income; only the pay differential or “premium” (i.e. the difference in pay rate between regular hours and overtime hours) is excluded.  If someone normally is paid $16 per hour, but earns $24 per hour during overtime, only the incremental $8 per hour qualifies for this new exclusion.

The deduction applies for tax years 2025 through 2028, and allows individual taxpayers a deduction of up to $12,500 for qualifying overtime wages ($25,000 in the case of a joint return). Similar to the phase-out of the tip income deduction, the deduction for overtime wages is reduced by $100 for each $1,000 of modified adjusted gross income exceeding $150,000 ($300,000 for joint filers). Therefore, the deduction is fully disallowed once modified adjusted gross income hits $275,000 for single filers and $550,000 joint filers.

The BBB also imposes similar documentation requirements for employers to report the overtime wages eligible for the deduction (see Sections 6041 and 6051).

Editorial comment: The adjustments for taxes on tipped income and taxes on overtime are very similar, with the same phase-out ranges, same sunset timeline, and similar total income exclusions. While this item of the BBA received a lot of run-up media attention, the limitations involved reduce its total potential benefit.  Certainly, this is a tax benefit many taxpayers may appreciate, but the final product is far less generous than first proposed.

Executive Compensation Deduction Limitations  

The BBB also provides additional limitations under Section 162(m) relating to excessive executive compensation.   In general, Code Section 162(m) prevents publicly held corporations from claiming a deduction against income for certain employees’ compensation that exceeds $1,000,000.

The BBB expands on this limitation by introducing additional aggregation rules. The changes mean that, for the purpose of determining if an individual had more than $1,000,000 in compensation, you would now look at the sum of all compensation paid to the covered individual by all entities in a control group.

Employer Provided Meals and Entertainment:

We previously published articles on the tax rules for meals and entertainment expenses, including our most recent one published in December of 2024.

The BBB does not do much to upset the apple cart when it comes to the meals and entertainment deduction rules, but there is one addendum relating to employer provided meals:

Under current rules, there are a number of exceptions, but most meals expenses have been 50% deductible. One such exception, though, relates to meals provided for the convenience of the employer (for example, meals provided on employer premises that would allow employees to work into the evening).  Those meals have been fully (100%) deductible, but under TCJA this feature was scheduled to sunset, thereby becoming nondeductible after December 31, 2025. Many speculated that future legislation would extend the life of this “for the convenience of the employer” exception, but the BBB did not do so – at least not broadly.  It instead allowed this 100% deduction category to sunset, other than for employers who operate their own eating facility.

To be clear, the rule change leaves alone the fact that most meals remain 50% deductible generally.  It instead impacted the meals that enjoyed a 100% deduction, by extending the life (removing the sunset) for some of them, but completely pulling the plug on any deduction for the rest.

The “for the convenience of the employer” meals are not quietly herded from the 100% deductible to 50% deductible category; they are beginning in 2026 fenced into their own 0.0% deductible pen.

The ultimate implication of these changes seems to be that either the employer can have a tax deduction for the expense by charging employees fair-market-value for the food and dining costs, or employees can receive a non-taxable benefit for which the employer receives no deduction – but not both. When it comes to the meals and entertainment expense rules, it seems like both sides of the transaction can no longer have their cake and eat it too.

ABLE Accounts:

ABLE accounts are tax savings vehicles designed specifically to assist people with disabilities. Funds from these ABLE accounts can help designated beneficiaries pay for qualified disability expenses. Distributions are tax-free if used for qualified disability expenses. The BBB would change ABLE accounts in a few different ways, all of which are generally expansive:

• Under current law, ABLE accounts are allowed an additional annual contribution under an “ABLE-to-Work” provision. The additional contribution is equal to the lesser of (1) the applicable federal poverty level for a one-person household in the prior year, or (2) the beneficiary’s compensation for the year. This additional contribution allowance was set to expire by December 31, 2025, but the BBB will make this additional contribution allowance permanent and would also inflation-index the annual allowed additional contribution.
• Similarly, contributors to ABLE accounts may also be eligible for the Saver’s Credit, but this expansion of the Saver’s Credit was also set to expire by December 31, 2025. As with the additional contribution allowance, the BBB will make the connection between ABLE accounts and the Saver’s Credit permanent.
• A provision of the BBB would also make permanent a connection between 529 Plans and ABLE accounts. Again, existing tax law only allows rollovers from 529 Plans into ABLE accounts through December 31, 2025, but the BBB will make this rollover provision permanent.

Editorial comment: The expansion of these ABLE account provisions may allow working individuals living with disabilities to continue to contribute additional income to their ABLE accounts and provide more long-term, stable economic and tax planning strategies.

Employer-Provided Tax-Free Student Loan Payments:

The BBB extends the allowance of student loan payments under Section 127 Plans. Section 127 Plans allow employers to provide qualifying educational benefits to their employees on a tax-free basis, subject to an annual dollar-value limitation. These Plans were previously expanded to allow employer payments of student loans to also be excluded from taxable income, but only through January 1, 2026. The BBB strikes away this sunset, allowing Section 127 Plans to continue allowing employers to pay off their employees’ student loans on a tax-free basis. Additionally, the BBB inflation-indexes the annual tax-free benefits that may be covered by Section 127 Plans (beginning after 2026). Previously the annual tax-free allowable benefits were locked at a fixed dollar amount.

HEALTH AND WELFARE PLANS:

The BBB provides an important change to Health Savings Accounts (HSAs).  Beginning in 2026 the Act will treat Bronze-level and Catastrophic-level marketplace plans available under an ACA exchange as “high-deductible health plans.”  This is a significant change that will allow individuals covered under these plans to enroll in and contribute to an HSA.

Editorial comment: Perhaps the most contentious aspects of the BBB overall were its changes to public health and assistance programs, such as funding reductions to Medicare/Medicaid and SNAP programs. It will be interesting to see if Congress tries to take up these HSA and HRA adjustments again with some future legislation, in an attempt to counterbalance those cuts. As it stands, though, by at least expanding what is considered a HDHP, the BBB does increase the number of low-cost insurance coverage options available in the wider marketplace. Because of the many tax advantages an HSA offers, the expansion of what is defined as a “high-deductible health plan” may offer more individuals an opportunity to take advantage of a popular tax and wealth saving strategy.

OTHER COMPENSATION AND BENEFIT RELATED CHANGES UNDER THE BBB:

Moving and Relocation Expenses:

Currently, only active-duty military personnel can exclude employer-provided moving expense reimbursements from taxable income—a change introduced by the TCJA, which eliminated this benefit for most taxpayers. The BBB extends the current treatment, effectively maintaining the exclusion for military members and preventing any further changes to the tax treatment of these reimbursements.

Editorial comment: For moving expense reimbursements, there is no rule or law that prevents employers from continuing to offer these benefits. The current regulations and effect of the BBB would simply mandate that such benefits be taxable income. Employers have had and continue to have the option to provide these benefits on a taxable basis. Employers could then, should they wish, also “true-up” payments to employees to “make them whole” for the tax impact of the benefit. Such a payment would itself be taxable to the employee, though, and such a circular calculation may be more administratively burdensome than some employers want to deal with.

Parking:

The TCJA also previously made effective the dreaded and complex “parking income inclusion rules.” Despite tax professionals’ prayers, the tax on employer-provided parking above the “qualified parking benefit” threshold is still considered taxable income. As it stands, the BBB will not be the answer to the tax industry’s prayers, and certain parking benefits will remain taxable until some other, later tax bills become law.

For more information regarding the qualified parking income inclusion rules, please see our previous article on this subject, published in December 2018.

Bicycle Commuting:

The BBB permanently eliminated the tax-free bicycle commuter benefit account. Employers can continue to reimburse these expenses but on a post-tax basis only.

STUDENT LOAN DISCHARGE

Normally when a debt someone owes is forgiven, tax rules require that the beneficiary of that forgiveness reports taxable income of that amount (the same treatment that would apply if they were handed income and used it to pay off the loan). Student loans are one example. In recent years, exceptions have been provided for loans of students who died or became disabled, allowing that debt to be discharged tax-free. In 2021 this benefit was extended much further to allow tax-free discharge of student loans for nearly all students (not only those who are dead or disabled). The tax-free nature of all discharges was to expire after 2025, but the BBB salvaged it – but only for loans of students dead or disabled.

CONCLUSION:

Given the sweeping nature of this new spending and tax legislation, I would encourage everyone to review the rest of our articles in this series to see what changes may be hidden here which could impact your personal tax and economic situation.

For more information, please contact your BNN tax service provider at 800.244.7444.