A massive piece of legislation will soon have an oversized impact on employers and employees alike.  Enacted on July 4, 2025, H.R. 1, the “One Big Beautiful Bill Act” (the Act), introduces significant changes across a broad range of compliance areas—from overtime and tip taxation rules to paid leave policies and immigration enforcement.

While many of the Act’s provisions won’t take effect immediately, employers need to begin preparing now. To help you stay ahead, we’ve broken down the key provisions that will have the greatest impact on organizations.

Here’s what you need to know:

Tax Changes on Tips and Overtime

The Act introduces new individual income tax deductions related to tips and overtime that will affect employers. Here’s an overview of the main provisions:

• Fewer Taxes on Tips: Employers must continue to report tips on W-2s for employees and 1099s for non-employees. The deduction for tips is capped at $25,000 per year. Only cash tips (including charged and reported under tip-sharing) and tips reported to employers are eligible. The deduction is reduced when the individual’s modified adjusted gross income (MAGI) exceeds $150,000 ($300,000 in the case of a joint return). However, not every industry will be affected. The Treasury Department is expected to publish a list of eligible tipped occupations by October 2nd.  
• Fewer Taxes on Overtime: The deduction for overtime pay is capped at $12,500 per year for individuals and $25,000 for those filing jointly. The deduction is limited to the premium portion of overtime pay (the extra amount above the regular hourly rate) required by the FLSA. The deduction is reduced when the individual’s MAGI exceeds $150,000 ($300,000 in the case of a joint return).

How will this affect employers?

Employers will need to separately track overtime premiums and tip pay in payroll systems and prepare for potential new W-2 reporting requirements related to these deductions. It’s important to note that these deductions are temporary and expected to expire on December 31, 2028.

Since the bill passed halfway through the year, there will be ways to apply these changes retroactively. A transition rule will allow employers to use "any reasonable method" specified by the Treasury Secretary to estimate the amount of qualified overtime and qualified tips for 2025, as well as guidance on any changes in tax forms, instructions and processes for treatment of the deductions for future tax years through 2028.

Paid Family and Medical Leave Credit

The Act makes permanent and enhances the Section 45S paid family and medical tax credit, which was set to expire in 2025. This includes allowing employers in states with mandated paid family and medical leave (PFML) to claim the credit not only on wages paid during leave but also on premiums paid for insurance policies providing PFML.

Additionally, the Act allows employers in states with mandated paid leave to claim the credit for leave provided beyond the mandated requirements, and it lowers the employee eligibility period from 12 to 6 months.

Employers must have a written policy meeting IRS requirements, including offering at least two weeks of PFML annually and paying at least 50% of normal wages. Record keeping for employees on leave and wages paid is necessary. To claim the credit, eligible employers must file Form 8994 and Form 3800 with their tax return.

Making the credit permanent provides certainty and reduces financial risk. The credit encourages employers to invest in paid leave programs, helping to attract and retain talent. Employers also have more flexibility in structuring programs and claiming the credit, based on wages or insurance premiums.

Employer-Provided Child Care Credit

The Act increases the employer-provided child care credit, effective tax years beginning after December 31, 2025, potentially making it more attractive for businesses to offer child care assistance.

• Increased Credit: The maximum credit is increased from $150,000 to $500,000, and the percentage of qualified child care expenses covered increases from 25% to 40%. Eligible small businesses have different provisions, including a $600,000 maximum credit and 50% of qualified expenses.

High Deductible Health Plan and Health Savings Account Expansion

The Act offers employers and employees flexibility in how to use pre-tax health dollars. This includes coverage for telehealth and remote care services, retroactive to plan years beginning after December 31, 2024. Employees will be permitted to use pre-tax health dollars to pay for direct primary care service arrangements, with limitations, effective for months beginning after December 31, 2025.

Dependent Care Flexible Spending Account Limit Increase

The maximum annual exclusion from gross income for IRS Section 125 dependent care FSA has been increased from $5,000 to $7,500 (from $2,500 to $3,750 for married individuals filing separate returns). Employers must amend their Section 125 cafeteria plan documents.

Information Reporting 

The threshold for reporting certain payments and remuneration for services, including payments reported on Forms 1099-MISC and 1099-NEC, increases from $600 to $2,000 for payments made after December 31, 2025.

Trump Accounts

The Act creates a new custodial account for qualifying children akin to a Section 408(a) IRA with a contribution limit of $5,000. Optional employer contributions up to $2,500 to the account would be excluded from the employee’s gross income. Guidance and regulations from the Treasury Department are expected.

Immigration and Customs Enforcement Operations

Adding to a very fluid situation, the Act may result in an increase of Form I-9 audits and inspections. The Act has allocated substantial funding to the U.S. Immigration and Customs Enforcement (ICE), suggesting a likely increase in worksite enforcement activities, including I-9 audits and inspections. 

A I-9 audit typically starts when ICE serves an employer with a Notice of Inspection (NOI), requesting the production of I-9 forms and supporting documentation. 

Less common than I-9 audits, worksite enforcement actions, often referred to as raids, involve ICE agents entering the workplace to detain unauthorized workers. Unlike I-9 audits, ICE agents do not provide prior notice for a worksite enforcement visit. To learn more about how employers can prepare for potential ICE encounters, click here.

The passage of the OBBB Act doesn’t mark a beginning and end to compliance requirements for employers. As the situation continues to evolve, the isolved HR Services team will continue to provide actionable guidance and recommendations to ensure your organization remains compliant. To review the Act in its entirety, visit https://www.congress.gov/bill/119th-congress/house-bill/1

If you’re looking for ways to prepare for impending changes, get in touch with our expert team of HR professionals here.

^{Disclaimer. The information provided herein is for general informational purposes only and is not intended to be legal, investment or tax advice. It is not a substitute for professional legal, investment or tax advice, and you should not rely on it as such. No attorney-client or accountant-client relationship or any other kind of relationship is formed by any use of this information. The effective date of various provisions, amendments, and regulatory guidance may impact eligibility. The accuracy, completeness, correctness or adequacy of the information is not guaranteed, and isolved assumes no responsibility or liability for any errors or omissions in the content. You should consult with an attorney, investment professional or tax professional for advice regarding your specific situation.}

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