H.R. 1, "The One Big Beautiful Bill Act," Enacted July 4, 2025
The Act includes several significant changes that are relevant to employers for payroll, employment tax and employee benefits purposes.
H.R. 1, "The One Big Beautiful Bill Act" (the Act), was signed into law on July 4, 2025. H.R. 1 includes several significant changes that are relevant to employers for payroll, employment tax and employee benefits purposes, with some key provisions effective retroactively as of January 1, 2025. The Department of the Treasury and the IRS are expected to issue guidance in the coming weeks to clarify how certain provisions will be implemented. ADP will closely monitor developments and provide updates as more details emerge.
Among the Act's provisions, the new law extends or modifies several elements of the 2017 Tax Cuts and Jobs Act (TCJA), P.L. 115-97, many of which were set to expire at the end of 2025. In addition, the Act introduces new deductions to eliminate federal income taxes on certain tipped wages and overtime pay, as detailed below.
Impact to Income and Employment Taxes
Tax Cuts and Jobs Act Changes to Tax Rates Made Permanent
The Act permanently adopts the changes to federal tax rates and standard deduction amounts that have been in effect since January 1, 2018, following enactment of the TCJA. The standard deduction will also increase for the 2025 tax year and will adjust for inflation in each subsequent year. The Act also provides a temporary $6,000 annual deduction through 2028 for taxpayers aged 65 or older.
The Federal Deduction for State and Local Taxes ("The SALT Cap")
Under the TCJA, in the case of an individual, the itemized deduction for state and local taxes is capped at $10,000 ($5,000 for a married taxpayer filing a separate return). In general, income taxes paid or accrued in carrying on a trade or business or an income-producing activity are subject to the individual SALT cap. The SALT cap is set to expire for taxable years beginning after December 31, 2025.
The Act temporarily raises the federal cap on the SALT deduction from $10,000 to $40,000 starting in 2025, with inflation adjustments through 2029. The cap reverts to $10,000 in 2030. For those with modified adjusted gross income (MAGI) above $500,000 (2025), the limit on a taxpayer's deduction phases down, but will not drop below $10,000.
Qualified Overtime and Qualified Tips Deductible from Federal Income Tax
The Act includes a federal income tax deduction for both qualified overtime and qualified tips, effective for tax years 2025 through 2028. The deductions are available regardless of whether an individual chooses to itemize deductions or take the standard deduction and each deduction would phase out beginning when an individual's MAGI exceeds $150,000 for the year (or $300,000, for married filing jointly).
The deduction applies only to federal income taxes, so individuals and employers remain responsible for deducting and paying applicable Medicare and Social Security taxes with respect to qualified tips and overtime.
Qualified Overtime
Overtime eligible for the deduction is limited to $12,500 (or $25,000, for married filing jointly). "Qualified overtime" compensation means overtime required to be paid under Section 7 of the Fair Labor Standards Act (FLSA). Overtime not required by the FLSA (such as potentially more generous overtime required under state laws, a collective bargaining agreement, or paid voluntarily by employers) is therefore not eligible to be deducted. In addition, only the premium portion of overtime can be deducted. For example, if an individual is paid $10 per hour for non-overtime earnings, and $15 per hour for overtime, only the $5 per hour premium pay for overtime is eligible for the new tax deduction.
Qualified Tips
Tips eligible for the deduction are limited to $25,000. "Qualified tips" means cash tips received by an individual in an occupation which customarily and regularly received tips on or before December 31, 2024. The Act requires the Secretary of the Treasury to release a list of qualifying occupations within ninety days of enactment. Workers in certain specified businesses are not eligible for the tips deduction. Specified businesses include, for example, those providing services in accounting, health, law, actuarial science, athletics, brokerage services, consulting, financial services, or the performing arts.
"Cash tips" for purposes of the Act include tips received from customers that are paid in cash or charged and, in the case of an employee, tips received under any tip-sharing arrangement. The amount must be paid and determined voluntarily by the payor without any consequence in the event of nonpayment and cannot be the subject of negotiation. This would exclude, for example, mandatory service charges and mandatory gratuities. The Secretary of the Treasury is authorized to establish other requirements to qualify for the deduction.
ADP will provide updates when the additional guidance is issued on eligible occupations and other qualified overtime and tip deduction requirements.
Retroactive Application and 2025 Transition Rule
Both deductions are effective retroactive to January 1, 2025. The Act includes a transition rule that allows employers to use "any reasonable method" specified by the Secretary of the US Department of Treasury to estimate the amount of qualified overtime and qualified tips for 2025. The Treasury Department will issue guidance on reasonable methods to address the retroactive period for the new tax deductions, as well as guidance on any changes in tax forms, instructions, and processes for treatment of the deductions for prospective tax years, through 2028.
Trump Accounts: New Tax-Free Savings Vehicles for Minors
The Act establishes "Trump accounts," a new type of tax-advantaged savings account. Parents of any child under 18 may open a Trump account for their child. Parents, relatives, other taxable entities, and non-profit and government entities may all contribute. Contributions must be made on an after-tax basis for taxable entities and may not exceed $5,000 annually (indexed for inflation) while contributions from tax-exempt organizations are unlimited. Contributions can only be made before the beneficiary turns 18, while withdrawals can begin the year the beneficiary reaches 18.
Contributions may come from family members, employers, or public and charitable entities, although guidelines on how such contributions are made remain outstanding. A temporary newborn pilot program will allow the federal government to contribute $1,000 per child into every eligible account for children born between December 31, 2024, and January 1, 2029.
Changes to Certain Business Taxes
Research and Development Expenses
Under the TCJA, for tax years beginning after December 31, 2021, taxpayers were required to capitalize and amortize specified research and development (R&D) costs over a five-year period (or over 15-years for foreign R&D).
The Act allows taxpayers to immediately deduct domestic R&D expenditures after December 31, 2024. R&D conducted outside the U.S. must continue to be capitalized and amortized over 15 years.
Additionally, small business taxpayers with average annual gross receipts of $31 million or less will generally be permitted to apply the immediate expensing retroactively to taxable years beginning after December 31, 2021. Taxpayers that made domestic R&D expenditures after December 31, 2021, and before January 1, 2025, are permitted to accelerate the remaining deductions for those expenditures over a one-year or two-year period.
Employee Retention Tax Credit
The Act retroactively ends the Employee Retention Tax Credit (ERTC) program for third and fourth quarter (Q3 and Q4) 2021 claims that were filed after January 31, 2024, effectively codifying, for those quarters, the current IRS ERTC processing moratorium. While businesses are not eligible to claim any Q3 and Q4 2021 claims filed after that date, claims from those quarters that were filed before January 31, 2024, will still be processed. Claims from prior quarters are unaffected by the Act.
The new law also extends the statute of limitations for the IRS to assess the validity of Q3 and Q4 2021 ERTC claims. The IRS now has six years, as opposed to five years, from the date of filing to assess and audit claims from these quarters. The statute of limitations for 2020 and the first and second quarters of 2021 remains unchanged and is three years,
Changes to Certain Employee Benefits
Enhancement of Employer-Provided Childcare Credit
Currently, the employer-provided childcare credit provides businesses with a nonrefundable tax credit of up to $150,000 per year on up to 25% of qualified childcare expenses provided to employees. Therefore, an employer must spend at least $600,000 on childcare related expenses to receive the full credit.
The Act permanently enhances the employer-provided childcare tax credit by raising the maximum credit from $150,000 to $500,000 and increasing the percentage of childcare expenses covered from 25% to 40% of qualified expenses (e.g., amounts incurred in constructing a childcare facility or training childcare employees). To claim the full amount, a business must spend at least $1.25 million on childcare services.
Eligible small businesses benefit further as the maximum credit increases to $600,000 with a 50% credit rate, requiring $1.2 million in eligible spending to receive the full credit. An eligible small business is one that meets the gross receipts test of less than or equal to $25 million (inflation adjusted) based on the 5-year period (rather than 3- year period) preceding the taxable year. In 2025, the small business gross receipts threshold is $31 million.
Additionally, the Act allows small businesses to pool their resources to provide childcare to their employees and for businesses to use a third-party intermediary to facilitate childcare services on the business's behalf.
Paid Family and Medical Leave Tax Credit
The Act permanently extends the federal paid family and medical leave employer tax credit that was created by TCJA and set to expire at the end of 2025. The scope of the credit was also expanded.
Under the original TCJA framework, eligible employers could claim a general business credit equal to 12.5% of wages paid to qualifying employees on paid family and medical leave, provided they paid at least 50% of the employee's regular wages. The credit increased incrementally by 0.25% for each percentage point above that 50% threshold, up to a maximum credit of 25%. The credit applied for up to 12 weeks of leave annually per employee. To qualify, employers had to maintain a written policy granting full-time workers at least two weeks of paid family and medical leave, with part-time employees eligible on a proportional basis. Employees also had to have been employed for at least one year and earn less than 60% of the highly compensated employee threshold.
The Act updates this structure by making the credit permanent and lowering the employment tenure requirement to six months, thus expanding eligibility. Additionally, the Act clarifies that state, or locally mandated paid leave now counts toward satisfying the eligibility requirements for the credit, without impacting the amount of credit an employer may claim. The bill further expands the program to allow employers to claim the credit for amounts paid as premiums for qualifying paid leave insurance policies.
Deduction for Business Meals
Currently, for amounts incurred and paid after December 31, 2017, and before January 1, 2026, or expenses of the employer associated with providing food or beverages to employees through an eating facility that meets the requirements for de minimis fringes and for the convenience of the employer are limited to a 50% deduction. Such amounts incurred and paid after December 31, 2025, are not deductible.
The Act maintains the current exemptions from the 50% deduction limitation, thereby preserving – and in some cases increasing - the amount eligible to be deducted. Notably, the Act expands the list of exemptions to include food or beverage provided on certain fishing vessels or certain fish processing facilities, making those meals fully deductible.
Qualified Transportation Fringe Benefits
The bike commuter tax benefit, which allowed employers to reimburse employees up to $20 per month tax-free for bicycle commuting expenses, was suspended in 2018 by the TCJA. This suspension was originally scheduled to last until the end of 2025.
The Act permanently eliminates the $20 per month qualified bicycle commuting reimbursement benefit. For qualified transportation fringe benefits other than the qualified bicycle commuting reimbursement, the Act adds an additional year of inflation adjustment.
Qualified Moving Expense Reimbursements
Both the tax-free qualified moving expenses reimbursement for employees and the employer deduction for moving expenses were suspended in 2018 by the TCJA. This suspension was originally scheduled to last until the end of 2025.
The Act permanently removes both the exclusion for qualified moving expenses reimbursement and the deduction for moving expenses, except for active-duty members of the Armed Forces and members of the Intelligence Community.
For more information, register for our July 17 webinar, Unpacking the One Big Beautiful Bill Act: Impacts for employers.
ADP Compliance Resources
ADP maintains a staff of dedicated professionals who carefully monitor federal and state legislative and regulatory measures affecting employment-related human resource, payroll, tax and benefits administration, and help ensure that ADP systems are updated as relevant laws evolve. For the latest on how federal and state tax law changes may impact your business, visit the ADP Eye on Washington Web page located at www.adp.com/regulatorynews.
ADP is committed to assisting businesses with increased compliance requirements resulting from rapidly evolving legislation. Our goal is to help minimize your administrative burden across the entire spectrum of employment-related payroll, tax, HR and benefits, so that you can focus on running your business. This information is provided as a courtesy to assist in your understanding of the impact of certain regulatory requirements and should not be construed as tax or legal advice. Such information is by nature subject to revision and may not be the most current information available. ADP encourages readers to consult with appropriate legal and/or tax advisors. Please be advised that calls to and from ADP may be monitored or recorded.
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Updated on July 8, 2025
