Less Payroll Taxes for Your Employees Starting Now

If you have employees on payroll, there’s a big federal tax law that just passed—and it could impact the way you manage payroll, benefits, and year-end reporting.

On July 4, 2025, the federal government signed H.R. 1 into law. It includes several updates that affect employers and employees starting this year and next. But here’s the issue: most payroll providers won’t say a word about it—or they’ll leave it up to you to figure out what to do.

At Baron Payroll, we believe you deserve a payroll provider that keeps you in the loop, protects your business, and helps you stay compliant without lifting a finger.

Let’s break down what you need to know.

Key Changes You Should Know About

Here are the main tax and payroll-related provisions in the new law:

1. No Tax on Tips (Retroactive to January 1, 2025)

Employees who receive tip income can now deduct up to $25,000 per year. This deduction phases out once adjusted gross income exceeds $150,000 (individual) or $300,000 (joint).

If your business includes tipped workers, it’s essential that your payroll system accurately tracks and separates those tips—otherwise your employees may miss out, and your reports may not hold up under scrutiny.

2. No Tax on Overtime

The law allows employees to deduct the premium portion of their overtime (the “time-and-a-half” part). The deduction is capped at $12,500 per individual, or $25,000 for joint filers.

This means your payroll system needs to properly identify and record the premium portion of overtime—not just total hours. If your provider isn’t doing this right, your team could be in for a frustrating tax season.

3. Flexible Spending Account (FSA) Limit Increases

Starting in 2026, FSA contribution limits are increasing:

$7,500 for individual filers
$3,750 for married individuals filing separately

If you offer an FSA, your plan documents and open enrollment materials will need to reflect these changes.

4. 1099 Reporting Threshold Increased

The IRS is raising the threshold for 1099-MISC and 1099-NEC forms:

Starting in 2026, businesses won’t have to file a 1099 unless they pay someone $2,000 or more (up from the current $600 minimum).
This new limit will be indexed for inflation beginning in 2027.

Important: This change applies to payments made after December 31, 2025—so you’ll need to adjust your year-end tracking.

5. Health Savings Accounts (HSAs) Get More Flexibility

Telehealth services will continue to be covered before a high-deductible health plan’s minimum deductible is met. This change is retroactive to January 1, 2025.
Starting in 2026, direct primary care arrangements will be considered eligible HSA expenses.

Why These Changes Matter to Your Payroll

Here’s the big takeaway: Most of these new deductions depend on having the right payroll data tracked accurately throughout the year.

That means:

Tip income must be recorded correctly.
Overtime premiums must be separated from regular pay.
Your 1099 tracking process will need to change.
Benefit plans must be updated in time for 2026 open enrollment.

If your payroll provider isn’t talking to you about this—that’s a problem.

How Baron Payroll Has You Covered

At Baron Payroll, we don’t expect you to stay on top of every federal update—we handle that for you.

Here’s how we’re helping our clients stay ahead of H.R. 1:

We track tip and overtime income correctly so your employees can take full advantage of the new deductions.
We update your payroll reports and system configuration behind the scenes—no manual work for you.
We help you prepare for year-end reporting and adjust 1099 processes so you're ready for 2026.
We guide you through benefit updates to ensure your FSA and HSA documentation stays compliant.

And most importantly, we’re always here when you call—with real support from people who understand your business.

Curious Whether Baron Might Be a Fit for Your Business?

At Baron Payroll, we combine hands-on support with smart technology—so your payroll runs smoothly, your records stay accurate, and you never have to worry about compliance surprises.

Use our Instant Price Calculator to get your detailed price—no sales call required.

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