How the One Big
Beautiful Bill Act impacts employers and employees

No tax on tips (up to a point)

One of the bill’s headline changes is a new, above-the-line deduction for federal income tax withheld on tip income (up to a maximum of $25,000). This applies to reported tips (those that appear on an employee’s Form W-2 or a contractor’s Form 1099-NEC or Form 1099-K), not untracked cash tips. Keep in mind, this is also limited to certain industries, to be determined by the treasury secretary, and excludes certain kinds of tips, like mandatory service charges and gratuities.

Like the “no tax on overtime” deduction, this above-the-line deduction lowers an individual’s adjusted gross income (AGI) when they file their taxes at the end of the year. This deduction is also allowed to non-itemizers, meaning tip earners may claim this deduction along with the standard deduction. While this will reduce a tip-earning worker’s tax obligation, it could also impact his or her ability to qualify for loans and/or certain benefits.

It’s important to note that the new deduction only applies to federal income tax withheld from tip income. Tax withheld on tipped minimum wage income does not qualify. The deduction does not apply to withheld Social Security or Medicare tax amounts, or to any state or local tax withholdings. Workers (and employers) must pay these taxes on all tip income (up to specified levels).

The maximum amount allowed for this deduction ($25,000) begins to phase out at $150,000 adjusted gross income ($300,000 for joint filers).

Overtime pay provision

Another headline change introduced by the bill offers targeted relief for employees who put in a lot of overtime. Between 2025 and 2028, individuals can deduct a portion of their overtime pay, up to the following limits:

• $12,500 if filing single
• $25,000 if married filing jointly

The deduction applies only to federal income tax withheld from overtime premium pay for hours worked above forty in a week. Tax withheld from regular-rate pay cannot be included when calculating the deduction amount.

Like the “no tax on tips” deduction, this above-the-line deduction lowers a worker’s modified adjusted gross income (AGI) when they file their taxes at the end of the year. This reduces their federal income tax obligation on overtime premium pay, but it could also impact their ability to qualify for loans and/or certain benefits.

1099 threshold increases to $2,000

If you’ve ever paid a contractor more than $600 in a year, you probably know the drill: send the contractor a Form 1099-NEC. The same $600 rule also applied to certain non-wage payments — such as settlements that include penalties or emotional distress damages — reported on a Form 1099-MISC.

That’s about to change.

Starting in 2026, the reporting threshold jumps from $600 to $2,000 — and it’ll be adjusted for inflation beginning in 2027. The same $2,000 limit will also apply to backup withholding requirements (which kick in when someone fails to provide a correct taxpayer identification number on a Form W-9). The reporting threshold for 2025 is unchanged, at $600.

Tax Cuts and Jobs Act stays put

The tax rates established under the Tax Cuts and Jobs Act (TCJA) are now permanent. They were set to expire in 2025, but this action has been superseded by H.R.1. The current corporate tax rate, individual tax brackets, and key provisions of the TCJA, such as the doubled standard deduction, will remain in place beyond 2025.

SALT deduction limit increases

The cap on the state and local tax (SALT) deduction is set to increase significantly in 2025. In recent years, the cap was set at $10,000, but it’s been increased to $40,000. However, this only pertains to taxpayers with income below $500,000. The higher cap starts in 2025 and lasts through 2028. After that, it begins to phase down, unless this aspect of H.R.1 is extended.

Bonus depreciation is back at 100%

Thanks to H.R.1, businesses can once again fully deduct the cost of qualifying purchases in the year they’re made. This includes, but is not limited to, the acquisition of the following types of assets:

• Commercial vehicles
• Computers and office technology
• Industrial equipment, tools, and machinery
• Office furniture and some building improvements

So, if your business buys $20,000 worth of equipment — maybe some new standing desks for the office — you can deduct the full amount in year one, as opposed to over an extended, multi-year period.

Paid family leave credit gets locked in with looser rules

If you offer paid family or medical leave — whether it’s required in your state or you choose to provide it — there’s another aspect of H.R.1 you should know. The federal tax credit for paid family and medical leave (PFML), which was created under the TCJA, and was set to expire at the end of 2025, is now permanent — and reflective of the new features outlined below.

• The employment requirement is being shortened from a year to six months, enabling more workers to qualify.
• State and local paid leave mandates now count toward meeting the eligibility rules — without reducing the credit.
• You can now claim the credit for premiums paid on qualifying leave insurance policies, not just direct payments.

New rules make HSAs easier to use

Health savings accounts (HSAs) are getting an upgrade that could open the door for more people to participate.

To start, “Bronze” and “Catastrophic” plans purchased through the healthcare exchange are now HSA-eligible. This shift expands access to individuals who previously couldn’t save using these accounts.

There’s also a new option to use HSA funds for direct primary care arrangements — up to $150/month for individuals and $300/month for families. This arrangement allows someone to pay a flat fee directly to a doctor or clinic for routine primary care, and it’s gaining traction as an affordable alternative to traditional insurance for everyday needs.

There’s also some news for telehealth fans: the bill extends a COVID-era rule that lets high-deductible plans cover telehealth visits before the deductible is met without disqualifying the plan for HSA use.

Dependent care FSA cap is adjusted

Another notable aspect of H.R.1 relates to working parents and caregivers. Specifically, the dependent care flexible spending account (FSA) limit is increasing from $5,000 to $7,500, which gives your employees an extra $2,500 in pre-tax savings they can put toward care expenses.

This is the first savings limit adjustment since the 1980s. This amendment is long overdue, as childcare and elder care costs have soared over the past four decades.

QBI deduction gets a fresh boost

The qualified business income (QBI) deduction, also known as the Section 199A deduction, is sticking around — and it’s more accessible than ever.

If you’re a sole proprietor, partner, or S Corp owner, this deduction lets you write off up to 20% of your business income. Consider the following scenarios:

• Do you earn $150,000? You might only be taxed on $120,000.
• Do you earn $30,000 via a side gig? This deduction still helps.

Cements the child tax credit

The child tax credit is now permanent, and starting in 2026, it will be adjusted annually for inflation. Currently, families can claim up to $2,000 per qualifying child, but, as outlined below, the credit is income-dependent.

• For married couples filing jointly, a phase-out begins at $400,000.
• For other filers, it starts at $200,000.
• The credit reduces by $50 for every $1,000 of income earned in excess of the threshold.

R&D write-offs just got more flexible

Research and development (R&D) expenses can now be deducted more quickly — and in some cases, retroactively.

• Small businesses with $31 million or less in gross receipts can retroactively expense R&D costs going back to January 1, 2022.
• For everyone else, domestic capitalized R&D expenses paid or incurred in taxable years beginning after December 31, 2021, and before January 1, 2025, can now be deducted over one or two years, instead of five.

Not sure what counts as R&D? It could include expenditures for any of the following endeavors:

• Testing new product designs or improving existing ones
• Developing internal-use software
• Engineering or technical problem-solving