The One Big Beautiful Bill Act, or One Big Beautiful Bill, signed into law on July 4, 2025, is a sweeping federal statute containing tax and spending priorities that define President Trump's second-term agenda.
While its scope spans national policy, the real impact for employers lies in the operational changes it triggers across payroll, employee benefits, employment tax, and compliance requirements.
To help you navigate what's ahead, we're answering some of the most frequently asked questions we're hearing from HR leaders and business owners.
Some provisions in the One Big Beautiful Bill are effective retroactively to January 1, 2025, including a new tax deduction for federal income tax on overtime and tips. Employers should review payroll and W-2 reporting processes for the 2025 tax year to ensure compliance.
The One Big Beautiful Bill allows employees to deduct overtime earnings from their federal taxes. For employers, this means updating payroll systems to accurately track and report overtime pay, thereby avoiding errors and non-compliance.
The deduction applies to overtime pay earned for working more than 40 hours in a week, as defined by the FLSA. Only the premium portion earned from OT hours qualifies.
If an employee is paid $20 per hour for their regular wage and $30 per hour for overtime, the $10 premium is eligible to be deducted for federal taxes.
Employees who earn $150,000 or less in 2025, or $300,000 or less if filing jointly, qualify for this benefit. The exemption only applies to their qualified FLSA overtime earnings.
Employees can deduct up to $12,500 of qualified overtime income from federal taxes each year. Married couples filing jointly can exclude up to $25,000.
The overtime tax exemption applies to tax years 2025 through 2028. Congress will need to extend the exemption to continue beyond 2028.
Employers must report the total amount of qualified overtime pay on each employee's W-2 form. This information is necessary for employees to substantiate their federal tax deduction when filing. Accuracy in year-end reporting will be necessary for compliance.
No. Employees can only claim one of the deductions on their federal taxes. They will have to choose between either filing a deduction a tips or overtime.
No Federal Tax on Tips: A New Tax Deduction
The One Big Beautiful Bill allows individuals to deduct qualified tip income from their federal taxes. For employers, this means ensuring point-of-sale and payroll systems are accurately tracking reported tips, which must be reflected correctly on employee W-2s to support the new deduction.
Tips must be customary and regularly received in a qualifying occupation, and reported to the IRS, either by the employer (W-2), or by the individual (Form 1099-K, Form 1099-NEC, or Form 4317).
Examples of non-qualified tips include mandatory service charges or automatic gratuities added to large-party bills. The Secretary of the Treasury will publish a list of qualifying occupations within 90 days of the enactment.
Employees who earn $150,000 or less in in 2025, or $300,000 or less if filing jointly, can deduct qualified tip income. The deduction is only available for tips that were legally reported and subject to withholding.
Individuals can deduct up to $25,000 in qualified tip income each year, from taxable years starting in 2025 through 2028.
No. Employees can only claim one of the deductions on their federal taxes. They will have to choose between filing a deduction for tips or overtime.
The One Big Beautiful Bill places tighter guardrails on the ERTC, specifically claims for Q3 and Q4 of 2021. Employers who filed eligible claims by January 31, 2024, can still receive their refund. However, businesses that missed the deadline can no longer file for those quarters.
Claims for Q3 and Q4 of 2021 had to be filed by January 31, 2024. If a claim was filed after this date but already refunded, the IRS will not claw back those funds.
The IRS now has a 6-year window (instead of 5) to audit or assess ERTC claims for Q3 and Q4 of 2021. This extended statue of limitations starts from the filing date of the Form 941-X.
As an employer, you must keep detailed records and documentation for a longer period in case of a future IRS review.
The One Big Beautiful Bill makes several pandemic-era flexibilities around health savings accounts (HSAs) permanent, and adds new options for both employers and employees to take advantage of tax-free health savings.
Yes, the new law permanently allows high-deductible health plans (HDHPs) to cover telehealth services before the deductible is met, without affecting HSA eligibility.
This removes uncertainty for employers and makes it easier to design competitive benefits that meet employee expectations.
Beginning in 2026, HSA funds can be used to pay for certain direct primary care (DPC) arrangements. Employees can use pre-tax dollars for monthly DPC fees, giving them access to affordable, relationship-based healthcare. This opens the door for employers to support DPC as part of a broader health strategy.
Starting in 2025, individuals enrolled in bronze and catastrophic health plans through the ACA Marketplace will be allowed to contribute to an HSA. This expands access to part-time workers, gig economy employees, and others who previously didn't qualify.
Employers may see a higher HSA participation as a result.
Employers should review their current plan designs and begin planning for 2026. Employers must evaluate whether to support DPC access, update benefits communications, and ensure their systems can handle new eligibility rules. These changes offer a chance to expand the benefits' reach while staying compliant.
The One Big Beautiful Bill brings the first permanent increase to the Dependent Care Flexible Spending Account (FSA) contribution limit since the program was created in 1986.
Starting in 2026, employers will be able to offer a more generous cap, giving working families additional pre-tax relief at a time when childcare and elder care cost continue to rise.
Starting in 2026, the maximum amount an employee can contribute to a Dependent Care FSA will increase from $5,000 to $7,500 per year. This reflects the growing cost of childcare and elder care, giving working families more pre-tax relief.
No. Just like the current limit, the new $7,500 cap is not indexed to inflation. The limit will remain fixed unless Congress makes future updates.
Employers will need to communicate this during open enrollment to avoid confusion.
To offer the increased limit, employers will need to update their cafeteria plan documents and summary plan descriptions.
This change should be formally adopted before employees can take advantage of the new cap.
Not necessarily. Employers must still pass IRS nondiscrimination testing under Section 129 to ensure Dependent Care FSA plans don't disproportionately benefit highly compensated employees.
Many plans struggle to meet this requirement; employers should consult their benefits advisor before implementing the higher limit.
The One Big Beautiful Bill includes a significant increase in funding for Immigration and Customs Enforcement (ICE), signaling stepped-up federal enforcement around immigration compliance. For employers, this could mean more frequent audits, heightened scrutiny of Form I-9s, and stricter penalties for noncompliance.
Businesses will need to tighten up internal processes, ensure documentation is accurate and complete, and train managers who may be involved in hiring or reverification.
The boosted ICE budget means increased worksite enforcement activity, including frequent I-9 audits, investigations, and potential raids.
Employers in industries that rely heavily on immigrant labor may be especially affected.
Employers should conduct internal I-9 audits, correct technical errors, and ensure you have a consistent, compliant onboarding process.
While all employers must comply with Form I-9 requirements, industries with large numbers of foreign workers, such as agriculture, construction, hospitality, and manufacturing, may experience more frequent enforcement actions.
This new bill marks a major shift in how employers manage everything from payroll taxes to health benefits and workforce eligibility. We will continue to monitor developments and provide guidance as new rules and clarifications emerge.
CoAdvantage is here to help.
As employment laws and compliance requirements continue to evolve, staying ahead can be a full-time job. CoAdvantage provides expert compliance support backed by deep HR knowledge. From multi-state employment to benefits administration and workplace policies, our team helps you stay informed and navigate complex regulations with confidence.
Is keeping up with complex regulations overwhelming your day-to-day? Discover how CoAdvantage can help navigate HR compliance with confidence and let you focus on what you do best.
**The information provided on this website is for general informational purposes only and does not constitute legal advice. While we strive to ensure the accuracy and completeness of the information, we make no guarantees about its correctness, completeness, or applicability to your specific circumstances. Laws and regulations are subject to change, and you should consult a qualified legal professional before making any decisions based on the information provided here.