On July 4, 2025, President Trump signed H.R. 1 into law—formally known as Public Law 119-21 and informally referred to as the “One Big Beautiful Bill Act.” This sweeping legislation introduces several new tax deductions and credits aimed at easing the burden on working Americans and retirees, while also prompting important changes for payroll and HR professionals.
The IRS and U.S. Department of the Treasury are actively working on guidance to implement these provisions, and several sections will require updated reporting systems by 2026. Employers should prepare for increased complexity in year-end reporting and may need to update internal documentation to meet the new requirements. Below is a breakdown of the provisions most relevant to employers, employees, and HR teams.
No Tax on Tips (Sec. 70201)
Beginning retroactively on January 1, 2025, and lasting through December 31, 2028, qualified tip income reported by employees and eligible self-employed workers may be deducted—up to $25,000 per year. The deduction applies to tips properly reported on W-2 or 1099 forms and is available to both itemizing and non-itemizing taxpayers. It begins to phase out at a modified adjusted gross income (MAGI) of $150,000 for individuals and $300,000 for joint filers.
This deduction is available to workers in traditionally tipped industries, including food service and beauty services, and taxpayers must have a work-eligible Social Security number. The IRS has announced it will release occupation-specific guidance on October 2, 2025, to clarify which roles qualify. Employers are required to report total tip income and the employee’s occupation on tax forms and may approximate tips for 2025 using a reasonable method specified by the Treasury.
No Tax on Overtime (Sec. 70202)
Under the overtime tax deduction in the new law, employees and eligible independent contractors can deduct up to $12,500 in overtime pay ($25,000 for joint filers) starting in tax year 2025. This applies specifically to FLSA-defined overtime premiums, meaning the “half” portion of time-and-a-half wages for hours worked beyond 40 per week.
The deduction is available to both itemizing and non-itemizing taxpayers and begins to phase out for individual filers earning more than $150,000 ($300,000 for joint filers). Employers need to update their payroll systems to track and report qualified overtime separately on tax forms. For 2025, employers may approximate qualifying overtime using a reasonable method approved by the Secretary.
Car Loan Interest Deduction
Starting in 2025, individuals can deduct up to $10,000 annually in interest paid on qualified auto loans for personal-use vehicles. This deduction only applies to new vehicle purchases where the original use begins with the taxpayer, and the vehicle must weigh less than 14,000 pounds and be assembled in the United States. The Vehicle Identification Number (VIN) must be included on the tax return.
Leased vehicles and commercial-use purchases are excluded from this deduction. The benefit phases out for single filers earning over $100,000 ($200,000 for joint filers), and lenders must provide annual interest statements to both the IRS and borrowers.
Additional Deduction for Seniors
Taxpayers aged 65 and older are eligible for a new $6,000 deduction per individual, in addition to the standard senior deduction. This means married couples where both spouses qualify can deduct up to $12,000.
The benefit begins to phase out at $75,000 in MAGI ($150,000 for joint filers) and is reduced by 6 percent for every dollar above the threshold. The deduction is available to all eligible taxpayers regardless of itemization status. To claim it, taxpayers must include their Social Security number on the return and file jointly if married.
Trump Accounts (Sec. 70204)
A new custodial account type, commonly called “Trump Accounts,” has been created to support savings for qualifying children. These accounts function similarly to a traditional IRA, though they are not classified as Roth IRAs. The annual contribution limit is $5,000, adjusted for inflation, and employers may contribute up to $2,500 tax-free. Treasury and IRS guidance on this new account type is forthcoming.
Paid Family and Medical Leave Credit (Sec. 70304)
Beginning in 2026, employers can claim an enhanced tax credit for providing paid family and medical leave. They may elect to calculate the credit based on either a percentage of qualified leave wages or a percentage of qualifying insurance premiums. More detailed guidance from the IRS is expected.
Dependent Care FSA Limit Increases (Sec. 70404)
Effective for plan years beginning after December 31, 2025, the contribution limits for Dependent Care FSAs will increase. The cap rises from $5,000 to $7,500 for most taxpayers and from $2,500 to $3,750 for married individuals filing separately. Employers should prepare to update their plan documents and open enrollment materials accordingly.
1099 Reporting Threshold Changes (Sec. 70433)
For payments made after December 31, 2025, the reporting threshold for certain payments reported on Forms 1099-MISC and 1099-NEC will increase from $600 to $2,000. The new threshold will be indexed for inflation starting in 2027. This change impacts reporting for independent contractors, freelancers, and certain vendors.
Health Savings Accounts (Sec. 71306 & 71308)
Two key provisions expand the flexibility of Health Savings Accounts (HSAs). First, telehealth coverage without requiring a deductible under high-deductible health plans (HDHPs) is now permanent and retroactive to tax years beginning after December 31, 2024. Second, beginning in 2026, fees for direct primary care service arrangements may be paid from HSAs, with certain limitations.
What Employers Should Do Now
These new deductions and credits present an opportunity to support your employees—but they also introduce new tracking, documentation, and reporting requirements. Employers should begin reviewing their payroll systems to ensure they can track tip income and overtime pay separately. It’s also important to coordinate with benefits administrators to prepare for FSA and HSA changes and monitor IRS guidance for updates to W-2 and 1099 reporting.
ASAP Payroll is here to help. Our expert team will ensure your payroll processes stay compliant and efficient as the new provisions roll out.
Contact us today to learn how we can support your 2025 compliance planning and year-end reporting.