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New Tax Deductions and Employer Responsibilities Per H.R.1, the One Big Beautiful Bill Act

Spark Team

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H.R.1, also known as the One Big Beautiful Bill Act , is a significant new tax and spending law that became effective July 4, 2025. This comprehensive, nearly 900-page law covers various aspects, from tax deductions to employee benefits, with implications that employers must understand to help facilitate compliance and enhance operations. The United States Department of the Treasury and the IRS are expected to issue guidance in the coming weeks to clarify how specific provisions will be implemented. ADP will closely monitor developments and provide updates as more details emerge.

Key updates in H.R.1, the One Big Beautiful Bill Act, include permanent adjustments to tax rates and brackets initially introduced under the Tax Cuts and Jobs Act (TCJA) in 2017, with certain future adjustments for inflation. The standard deduction increases set by the TCJA are now solidified and enhanced, with additional benefits for senior taxpayers and specific deductions for interest paid on new vehicles, providing taxpayer relief.

The 2025 tax regulations also introduced new federal income tax deductions for qualified tips and overtime. Further guidance from the Treasury and the IRS is necessary to understand who is eligible and how to claim available deductions, particularly for the retroactive period (which commenced on January 1, 2025). In addition, Treasury is responsible for providing a list of occupations eligible for tipped income deductions. Potential changes to withholding procedures starting in 2026 related to tip and overtime income may necessitate new instructions and/or updates to tax forms, like Form W-4.

Additionally, the legislation introduces significant enhancements to various tax credits and deductions, benefiting businesses. Notable updates include an increase in the cap for child care expenses to $500,000 with a 40% reimbursement rate, and even higher caps for eligible small businesses, allowing them to earn substantial credits. Small businesses can collaborate to share child care costs, facilitated by third-party intermediaries, adding flexibility to the process.

Members of ADP's government affairs team, Melissa Kelly, senior director of government affairs; Dan Lewis, vice president of compliance programs and government affairs and Amy Miller, senior director of government affairs; presented a comprehensive review of some of the Act's provisions in a one-hour webcast now available on-demand: Unpacking the One Big Beautiful Bill Act: Impacts for employers.

"The Act provides several significant changes relevant to employers, including provisions related to payroll, employment tax and employee benefits," Lewis said. "Notably, some of the key provisions in the Act are effective retroactively to January 1, 2025, which creates additional complexities, including concerning tips and overtime. The Department of the Treasury and the IRS are expected to provide guidance in the coming weeks and months to clarify how certain provisions will be implemented. Obviously, ADP is closely monitoring that on our end."

A summary of the insights from Lewis, Kelly and Miller is below.

What are the new H.R.1 tax deductions and employer responsibilities?

H.R.1 introduces new tax deductions for qualified overtime and tips, providing financial relief to employees working extended hours or receiving tips. Employers may need to update payroll systems and procedures to account for these deductions. The Act expands child care and paid family and medical leave credit benefits. Employers need to review and adjust benefits offerings for compliance and employee participation.

The Act extends and makes permanent key tax provisions from the TCJA, including child and dependent care credits, dependent care assistance plans, and adoption credits. Employers should effectively communicate these benefits to their workforce.

The Act maintains and enhances the TCJA's increase in the standard deduction, adjusts future amounts for inflation, and introduces new deductions for seniors aged 65 or older. The child tax credit enhancements are made permanent and adjusted for inflation. Updates to charitable contributions include new deductions for non-itemizers and specific credits for contributions to scholarship-granting organizations.

Deductions for overtime and tips have specific qualifications and limitations.

Employers must understand these details and clearly communicate the complexities of these new deductions to their workforce. For example, deductions for qualified overtime and tips are subject to income thresholds and phase out once exceeded.

Overtime

• Overtime deductions apply only to the premium portion paid in accordance with the Fair Labor Standards Act (FLSA), generally at 1.5 times the regular rate for hours over 40 worked in a week.
• Overtime deductions are limited to $12,500 for single filers and $25,000 for joint filers, with reductions based on modified adjusted gross income.

Tips

• Tips deductions are limited to cash tips received voluntarily in customary tipping occupations before 2025 (the Department of the Treasury will define which occupations).
• Tips deductions are capped at $25,000 and phase out at higher income levels.
• The new deductions for qualified tips and overtime are temporary, retroactive from January 1, 2025, and expire after 2028 unless further legislative action occurs.

Understanding detailed requirements and ensuring accurate reporting is crucial for compliance and realizing benefits.

H.R.1 tax law updates for businesses: overtime, tips and R&D

The new law mandates the Secretary of the Treasury to issue regulations to manage deductions and prevent abuse, such as workers reclassifying other income as overtime or tips for federal income tax deduction benefits. Employers should consult legal counsel before altering their compensation structure in response to the H.R.1 law.

Monitoring state-level developments is also advisable, as many states have introduced legislation on state taxation of tips and overtime. Some states automatically align their revenue codes with the federal Internal Revenue Code, making qualified tips and overtime deductible from state income tax without additional action. For instance, Colorado, which tied its state tax code to the federal code, passed legislation for continued state taxation of overtime, but has not addressed tips.

The law temporarily raises the federal state and local tax (SALT) deduction cap from $10,000 ($5,000 for separate filers) to $40,000 ($20,000 for separate filers) starting in tax year 2025, with inflation adjustments through 2029, benefiting taxpayers in high-tax states. For those with modified adjusted gross income (AGI) above $500,000 ($250,000 for separate filers) in 2025, the deduction limit phases down but will not fall below $10,000. This change allows taxpayers to deduct a larger portion of their state and local taxes on federal returns.

The law also includes changes to business taxes, such as the immediate deductibility of domestic research and development (R&D) expenditures after December 31, 2024. This allows businesses investing in R&D to benefit from immediate deduction rather than amortizing over several years.

Eligible small businesses with average annual gross receipts of $31 million or less will generally be permitted to retroactively apply immediate expensing for domestic R&D to taxable years starting after December 31, 2021. Larger companies can accelerate remaining amortization from 2022 through 2024 over one or two years beginning in 2025. H.R.1 also coordinates immediate deductibility of domestic R&D expenditures with the research credit, potentially allowing more domestic small and midsize businesses to benefit from investments in innovation.

Learn more; register for this August 13 webcast: Gaining insights from H.R.1 on the R&D tax credit

Gaining insights from H.R.1 on the R&D tax credit

The Employee Retention Tax Credit (ERTC) program, initially created under the 2020 Coronavirus Aid, Relief, and Economic Security Act (CARES) and extended by the 2021 American Rescue Plan Act, is retroactively ended for third and fourth quarter 2021 claims filed after January 31, 2024. Claims from those quarters filed before this date will still be processed, and claims from prior eligible quarters remain unaffected. The law extends the statute of limitations for Q3 and Q4 2021 ERTC claims to six years and imposes penalties for "COVID ERTC promoters." The definition of that term expressly states that certified professional employer organizations (CPEOs), such as ADP TotalSource^®, are not considered ERTC promoters.

H.R.1 also addresses several business tax provisions, including making the Section 199A deduction permanent, restoring 100% bonus depreciation for specific property, increasing the maximum expense deduction under Section 179, and reinstating favorable treatment for business interest expenses under Section 163(j).

Permanent tax credit and health care provisions for businesses

The paid family and medical leave tax credit is now permanent, offering a tiered credit based on the percentage of wages covered by the employer during leave. The credit starts at 12.5% if the employer covers at least 50% of wages and increases to 25% if the full amount is covered. Employee eligibility has been expanded to require only six months of employment instead of a full year. Businesses can now claim the credit for premiums paid to qualifying insurance policies, in addition to wages paid.

H.R.1 has adjusted deductions for business meals and qualified transportation fringe benefits. Business meal deductions remain at 50% for amounts incurred and paid after December 31, 2017, until January 1, 2026. Certain exemptions have been preserved and expanded, including meals provided on specific fishing vessels or fish processing facilities, which are now fully deductible. The $20 per month qualified bicycle commuting reimbursement benefit has been permanently eliminated, although employers can still provide bicycle commuting assistance on a taxable basis. Qualified moving expense reimbursements have been removed, except for active-duty military and intelligence community members.

H.R.1 also impacts health care benefits and coverage, requiring employers to reassess healthcare plans, negotiate with insurance providers, update offerings, and inform employees of changes. Employers must follow guidance from the Department of the Treasury and the IRS to implement changes and reduce the risk of penalties.

Healthcare provisions in the law include enhancements to health savings accounts (HSAs), such as allowing pre-deductible telehealth coverage and direct primary care. However, the latter is not explicitly defined in H.R.1. Broader plan compatibility is now permitted, including bronze and catastrophic plans with higher out-of-pocket costs. Individual coverage Health Reimbursement Accounts (ICRA) and other expected HSA expansions were not included. The changes in the Affordable Care Act (ACA) include ending the COVID-era expansion and tightening eligibility for premium tax credits, which may lead to significant premium increases for some marketplace enrollees and a shift towards employer-sponsored group health plans.

Summary of H.R.1, the One Big Beautiful Bill Act's impact on employers and employees

The H.R.1 legislation introduces significant changes affecting tax deductions, child care credits, health care benefits. Employers must stay informed, including monitoring for further guidance or regulations from Treasury and the IRS, and should consider consulting with tax advisors and legal counsel regarding the new law. By proactively addressing these requirements, businesses can support their workforce, help to enhance employee satisfaction, and adapt to the evolving regulatory landscape.

The mix of permanent and temporary adjustments to tax provisions requires careful attention to qualifications and limitations, necessitating ongoing guidance from Treasury and IRS. Employers and taxpayers should monitor state-level developments and prepare for upcoming changes in tax regulations to realize benefits and facilitate adherence to new laws.

H.R.1 readiness resources

Don't wait – prepare your H.R.1 response now: Your guide to H.R.1: The One Big Beautiful Bill Act