OBBB and Iowa Unemployment Updates

From no federal tax on tips and overtime to Iowa’s updated unemployment wage base, big changes are taking effect that every employer should understand. While your payroll process may not need to change yet, your planning definitely should.

New federal and state laws—including the OBBB Act and Iowa unemployment updates—bring important changes every business should factor into compensation and tax planning.

OBBB Overview: What You Need to Know for Your Business

The One Big Beautiful Bill (OBBB), recently passed at the federal level, introduces significant tax changes around how employees report income from tips and overtime.

Key changes for employers

• No federal income tax on overtime pay or tips through 2028
• Tips are now deductions employees claim when filing taxes – not payroll tax exemptions.
• Tip Income Deduction Cap:
  • Up to $25,000
  • Phases out starting at $150,000 (single) or $300,000 (joint)
• Overtime Deduction Cap:
  • Up to $12,500 (single)
  • Up to $25,000 (joint)
• There is no change to payroll withholding or reporting at this time. Employers should continue withholding federal income, Social Security, and Medicare taxes on tips and overtime as usual—these remain subject to payroll taxes.
• New information obligations: Employers (and payors) must report totals of qualified tips and qualified overtime compensation on employees’ W-2s and/or via information returns, to support employee deductions.

Recommended Next Steps

• Start tracking tip and overtime data separately for payroll purposes.
• Prepare to estimate and include these amounts on 2025 W-2s.
• Watch for IRS updates—particularly the occupation list and detailed W-2 instructions. Future Systems is monitoring for IRS guidance on how these deductions may be reflected on year-end W-2s or tax filing materials.
• Communicate with employees: let them know deductions apply later, during tax filing—not in paychecks today.

Changes to Iowa Unemployment Insurance

As part of Iowa’s 2025 annual unemployment review, the state increased the weekly maximum benefit amount effective July 6. Aimed at simplifying a complicated system, the state has also made changes to employer unemployment insurance tax rates.

The major updates

• New maximum benefit for Iowans on unemployment: $763/week, increasing from $739.
• Iowa has reduced the maximum employer unemployment insurance tax rate from 9% to 5.4%, starting in 2026.
• The taxable wage base—the portion of employee wages subject to state unemployment tax—will also decrease in 2026, from $39,500 to $20,400, helping reduce overall employer tax liability.

Takeaways

• Employers won’t see payroll changes in 2025—just a boost in claimant benefits starting July 6.
• Real payroll impact arrives in 2026: reduced taxable base and a lower tax rate.

Stay Updated with Future Systems

At Future Systems, we stay ahead of evolving tax and labor laws so you don’t have to. If you have questions about these changes or want help preparing for upcoming rate shifts, our team is here to help.