One Big Beautiful Bill Act

At A Glance

On Thursday, July 3, 2025, Congress passed HR1, the One Big Beautiful Bill Act, and President Trump has signed the Act into law during a special event on July 4. The Act extends the tax cuts in the Tax Cuts and Jobs Act passed in 2017 and includes many new provisions affecting compensation and benefits, as highlighted below. Please note that the Act is quite large and includes numerous provisions. This alert is intended to provide a high-level summary only of the select provisions that may interest employers. 

Overview

Employee Tax

Eliminating Tax on Tips

The new law creates a federal income tax deduction under a new IRC Section 224 equal to tips that an individual receives during the tax year, subject to qualification.  This is retroactive to January 1, 2025, and will end December 31, 2028. Important to note:

• The provision applies to “qualified tips” defined as "cash tips received by an individual in an occupation which customarily and regularly received tips.” The IRS will provide additional definition soon. 
• The deduction is capped at $25,000. 
• High earners will be eligible for a reduced deduction. Specifically, the deduction will be reduced by $100 for each $1,000 by which the taxpayer's modified adjusted gross income exceeds $150,000 ($300,000 in the case of a joint return).
• Employees will be able to deduct tips on their individual tax returns. This will require minimal changes to employer reporting, as tips subject to Social Security taxes are reported in Box 7 of Form W-2.
• The law codifies a requirement for the Form W-2 to include the total tips reported to the employer, including tips above the Social Security wage base. 
• The law expands the business tax credit for the employer portion of FICA paid on certain tips for specific beauty services.
• We anticipate that the IRS will publish a list of occupations in which workers customarily and regularly receive tips in the future.
• Transition Relief
  • The law includes transition relief for qualified tips that must be reported for periods prior to January 1, 2026. 
  • Under the transition relief, filers will be able to approximate cash tips by any reasonable method specified by the IRS. Additional agency guidance is expected. 

Eliminating Tax on Overtime

The new law creates a new IRC Section 225 with a deduction for qualified overtime wages. Section 7 of the Fair Labor Standards Act of 1938 (FLSA) outlines overtime wages that qualify for federal overtime. The former law provided that overtime be included in gross income, subject to federal income and employment tax. Employers maintained records for overtime-eligible employees; however, there was no separate overtime reporting requirement for tax purposes. This new law is retroactive to January 1, 2025, and will end December 31, 2028. Important to note:

• The new law adds a requirement, like that for tips, to report overtime wages for federal income tax on Form W-2.
• Overtime wages will be included in Box 1 income; however, the IRS may modify the tax withholding rules to account for the new deduction.
• Different overtime rules may apply under state law or collective bargaining agreements, potentially posing additional challenges.
• Transition Relief
  • The law includes transition relief for qualified overtime that must be reported for periods prior to January 1, 2026. 
  • Under the transition relief, filers will be able to approximate qualified overtime by any reasonable method specified by the IRS. Additional agency guidance is expected. 

The following provisions are retroactive as of January 1, 2025:

Personal and Standard Deductions

• The standard deduction temporarily increases by $2,000 for married couples, $1,500 for heads of household, and $1,000 for individuals. This temporary increase will expire on January 1, 2029.
• The law terminates the deduction for personal exemptions.

The following provisions are effective January 1, 2026:

Personal and Standard Deductions

• The new law makes the standard deduction under the Tax Cuts & Jobs Act of 2017 permanent. 
• Adjustments for inflation will now apply to the 10% and 12% tax brackets.

ABLE Accounts

• The ABLE-to-Work provision will become permanent, allowing eligible working ABLE account owners to contribute above the standard annual contribution limit, subject to income and eligibility requirements.
• ABLE account owners will be eligible to claim a Saver’s Credit for contributions.
• Rollovers from qualified tuition programs to ABLE accounts will be permitted.

Student Loans

• The discharge of student loan debt due to death or total disability will be excluded from taxpayer income.
• The ability for employers to pay student loans under educational assistance programs up to $5,250 will be made permanent. This limit will be adjusted annually for inflation beginning January 1, 2027.

Paid Family and Medical Leave

The new law permanently extends the paid family and medical leave general business credit under IRC Section 45S. The credit is equal to either of the following: 

A. The applicable percentage of wages paid to qualifying employees during any period they are on family and medical leave. 

B. The applicable percentage of the total amount of premiums paid or incurred by the employer during said taxable year of the policy for employers with an insurance policy with a paid family medical leave provision in force during the taxable year. The payment rate under the insurance policy is determined without regard to whether any employees were on family and medical leave during the applicable taxable year. 

The above amended provisions apply to taxable years beginning after December 31, 2025. Important to note:

• The new law will allow employers who would have been previously disqualified by the former statute’s subtraction of leave required by state or local law to qualify for the credit by counting the required leave but taking the credit only on amounts not required by state or local law.
• The new law will allow eligible employers to claim the credit for a percentage of premiums paid for insurance policies that cover paid family and medical leave for qualifying employees or eligible wages paid to qualifying employees during any period they are on family and medical leave, but not both.
• At the election of the employer, a new provision to extend employee qualification for paid family medical leave to no fewer than six (6) months of employment is permitted.

Dependent Care Assistance Program

Effective tax years beginning after December 31, 2025, the new law increases the Dependent Care Assistance Program (DCAP) annual limit to $7,500 for single individuals and individuals who are married filing jointly and $3,750 for married filing separately. 

Health Savings Accounts

The new law makes a few changes to IRC Section 223 regarding health savings accounts (HSAs): 

• Effective for months beginning after December 31, 2025, Bronze and Catastrophic plans available under the Affordable Care Act (ACA) will be considered eligible high-deductible health care (HDHC) plans and, therefore, HSA compatible. 
• Effective for plan years beginning after December 31, 2024, the law permanently extends the deductible safe harbor for telehealth services. This will permit telehealth services to be provided prior to meeting the HDHP deductible without affecting an individual’s HSA eligibility. 
• Effective for months beginning after December 31, 2025, Direct Primary Care Service Arrangements will no longer be considered HSA-disqualifying coverage, provided they meet specific requirements.

Qualified Bicycle Commuting Reimbursements

The 2019 Tax Cuts and Jobs Act (TCJA) suspended the tax exclusion for qualified bicycle commuting expense reimbursements offered under a qualified transportation reimbursement plan subject to Section 132(f) of the Code. The new law makes this suspension permanent, effective for tax years beginning after December 31. 2025. 

Employer Contributions to Trump Accounts

Section 530A of the new law establishes “Trump Accounts,” a new type of tax-advantaged individual retirement account (IRA) modeled after traditional IRAs but designed specifically for minors under age 18. These accounts are created and regulated by the U.S. Treasury Secretary and have unique contribution, distribution, and investment rules. Employers can contribute to the Trump Account for their employees or their dependents, with key highlights below:

• An employee’s gross income will exclude employer contributions to a Trump Account that belongs to the employee or the Trump Account of an employee’s dependent(s).
• The exclusion applies to employer contributions of $2,500 or less.
• The employer must have a separate written plan in place. 

Employee Retention Tax Credits (ERTC)

The new law provides stricter enforcement measures for improper claims and misconduct related to COVID-related ERTC, including credits under IRC Section 3134 or CARES Act Section 2301. A promoter is any person who provides ERTC-related services in which fees are based on refund size and such services make up ≥ 20% of revenue, or ERTC services are ≥ 50% of revenue or over $500,000 and ≥ 20% of revenue. Certified Professional Employer Organizations (CPEOs) are excluded. Key provisions include:

• Increased penalties for promoters: 
  • $200,000 ($100,000 for individuals) or 75% of gross income earned from ERTC-related services.
  • $1,000 penalty per instance for promoters failing to meet due diligence standards.
• COVID-ERTC promotions are deemed “listed” and “reportable transactions” under Section 6111, 6112, 6706, and 6708.
• Extends the statute of limitations from 3 to 6 years for tax assessments on disallowed claims.
• No ERTC claims will be paid after enactment unless filed by January 31, 2024.