/>iOn July 4, 2025, H.R.1, or what is being called the One Big Beautiful Bill Act (“OBBBA”), was signed into law, introducing major reforms in tax and employee benefits that affect businesses and their employees. OBBBA is an expansive, omnibus legislative package that combines numerous, major policy proposals across a broad range of subject areas. The overarching purpose is ostensibly to cut spending by repealing or rolling back a significant number of wide-ranging provisions. OBBBA enacts new conservative policy priorities in taxation, spending, immigration, and social policy, and substantially modifies federal spending and certain entitlement programs.
According to the Bill’s sponsors, OBBBA is meant to benefit American employers. For example, under OBBBA, employers would benefit from permanent lower individual and pass-through tax rates, full expensing of business property and R&D, and enhanced paid leave credits. OBBBA also includes expanded and permanent tax credits and deductions for employer-sponsored health plans, wellness initiatives, childcare assistance, and retirement benefits. On the other hand, stricter workforce eligibility requirements for non-citizens could result in increased costs for employers.
Understanding the provisions of OBBBA and how they will affect employment will be important for employers as they adjust to new compliance requirements, updated benefit options, and budgeting opportunities.
Among the many changes enacted by OBBBA, employers should be aware of the following key provisions.
Tax Benefits & Employer Tax Credits
Depreciation and R&D Expensing
Bonus depreciation is a tax deduction allowing businesses to deduct a significant portion of an asset’s cost in the first year it is purchased, rather than spreading the deduction over the asset’s “useful life.” This allows businesses to reduce taxable income and lower tax liability, which, in turn, allows for the recovery of costs associated with capital expenditures. Under OBBBA, businesses can permanently claim 100% bonus depreciation on qualifying capital expenditures, eliminating the current phase-down (80% in 2023, 60 percent in 2024, etc., through 0% in 2027). Bonus depreciation will also apply equally to both new and used qualifying property. Compounding on the benefit, OBBBA broadens the definition of “qualified property” (e.g., certain leasehold and retail improvements), allowing taxpayers to immediately expense a wider array of business assets.
The Bill also further extends the bonus depreciation allowance to a wider range of interior building improvements—such as restaurant and retail fit-outs and qualified leasehold property. Locking in the 100 percent first-year expensing removes uncertainty in long-term capital planning.
Also, under OBBBA, full expensing for domestic R&D expenses is made permanent, allowing businesses to write off qualifying R&D expenditures and reducing after-tax development costs.
Pass-Through Entities Tax Deduction Made Permanent
Currently, Internal Revenue Code (IRC) Section 199A provides a 20% deduction for qualified business income for owners of pass-through entities (including LLCs, partnerships and S-corps) and sole proprietors. The provision was set to expire at the end of 2025, but under OBBBA the Section 199A deduction is made permanent. This business-friendly provision will effectively keep the lower tax rates for pass-through entities, allowing for more certainty for long-term planning.
Suspension of Employee Retention Credit (ERC) Claims and Other ERC Matters
The ERC afforded certain qualifying employers with a refundable tax credit who paid qualified wages to employees during the COVID-19 pandemic. Under OBBBA, claims for the ERC for the third quarter of 2021 filed after January 31, 2024 are retroactively suspended. Thus, the IRS will not issue refunds of the ERC for unpaid claims filed after January 31, 2024. There are also additional penalties for ERC “mill promoters,” and OBBBA extends the statute of limitations (the time that the IRS has to go back and revisit/audit the claim) to six years from the date of the claim. The statute of limitation extension applies only for ERC claims for the third and fourth quarter of 2021. The extended statute of limitations would generally expire on April 15, 2028, or six years from the date on which the claim for credit or refunds was filed, if later. This assumes that the original Form 941 filed by the employer for the quarter was filed no later than April 15, 2022.
Fringe Benefits
Enhanced Childcare Credit
Currently, the employer-provided child care tax credit allows businesses to claim a credit equal to 25% of their qualified child care expenses, with a maximum credit of $150,000 per year, regardless of company size. Under OBBBA, the credit percentage will increase to 40% for most employers and 50% for eligible small businesses, while the annual cap will rise to $500,000 – or $600,000 for eligible small businesses – with both caps subject to annual inflation adjustments starting in 2026. In addition, OBBBA expands eligibility by allowing the credit for payments made through third-party intermediaries contracting with qualified child care providers, and it expressly permits the credit for jointly owned or operated child care facilities. These changes are intended to increase the credit’s value and accessibility, especially for small and mid-sized employers.
Permanent, Indexed Student Loan Benefit
Under current tax law, employers can offer up to $5,250 per year in student loan repayment benefits to employees as a tax-free benefit, but this provision is temporary and was set to expire after 2025. OBBBA makes this employer-provided student loan repayment benefit permanent and indexes the $5,250 annual limit for inflation starting in 2026, ensuring that both the tax exclusion for employees and the deduction for employers remain available indefinitely and that the benefit will keep up with rising educational costs over time. This change not only provides certainty to employers and employees regarding the ongoing availability of this tax-free student loan repayment assistance, but it also gradually increases the maximum benefit available each year, making the program more valuable in the long term. Employers may be able to utilize this as an important recruitment and retention tool for younger workers.
Moving Expenses Exclusion
OBBBA permanently eliminates the tax-free, employer-paid moving expense benefit for all taxpayers except for members of the active-duty military and intelligence personnel. This provision was temporary under the Tax Cuts and Jobs Act of 2017, and if not extended or made permanent, would have reverted to the prior law that allowed for the exclusion from income of employer-paid moving expenses. OBBBA makes permanent the requirement for employers to include the value of this benefit in the taxable income of the recipient employees.
Elimination of Bicycle Commuting Reimbursement
Bicycle commuting reimbursement is discontinued; employers no longer need to administer this benefit.
“Trump Accounts” for Employees’ Children
OBBBA establishes “Trump Accounts,” which are special tax-deferred savings accounts created for every U.S. child at birth or soon after, allowing annual contributions up to $5,000 (with certain public or private funding permitted), restricting withdrawals to after age 18 (except for limited rollover or hardship exceptions), and limiting investments to ultra-low-cost U.S. index funds, with annual limits indexed to inflation. Employers can contribute up to $2,500 annually for employees’ children born between 2025 and 2028. To offer this, employers must adopt formal plan documents and meet nondiscrimination requirements similar to those for dependent care programs.
Health and Welfare Benefits
Expanded HSA Eligibility
Currently, individuals generally cannot make or receive Health Savings Account (HSA) contributions if they are covered by any health insurance plan other than a high-deductible health plan (HDHP), with certain limited exceptions. OBBBA provides that all Bronze-level and catastrophic health plans offered in the individual market on a state insurance exchange to be considered an eligible HDHP for HSA eligibility purposes.
Telehealth Safe Harbor
Health plans generally must impose a deductible before covering most services in order to be HSA-compatible, with only a temporary exception allowing coverage of telehealth services before the deductible without jeopardizing HSA eligibility. OBBBA makes permanent the rule allowing telehealth coverage before the deductible, without disqualifying the plan as HSA-compatible. In other words, employers can continue to meet employee demand for virtual care without risking HSA-compatibility with respect to its health plan design that includes telehealth services.
Dependent Care FSA Increase
The pre-tax limit for employer-provided, dependent care flexible spending accounts (FSAs) is currently $5,000 per year ($2,500 for married taxpayers filing separately). Under OBBBA, the pre-tax maximum is increased to $7,500 ($3,750 for married taxpayers filing separately), meaning employers can provide a more substantial tax-free benefit to employees that incur eligible child care expenses.
Executive Compensation
Aggregation Rule
Currently, public corporations cannot take a tax deduction for compensation paid to certain executives that exceeds $1,000,000 per year. Under OBBBA, starting in 2026, the total pay to the “top five” executives will be counted on a group-wide basis. The aggregation rule under Section 162(m) that currently applies for (i) identifying a corporation’s covered employees and (ii) determining compensation that is subject to the Section 162(m) deduction limitation, is expanded to pick up all members of a covered corporation’s controlled group and affiliated service group under Section 414(b), (c), (m) and (o) of the tax code (a broader group than under the existing aggregation rule). Under OBBBA, the amount of deductible compensation is allocated to each member of the controlled group or affiliated service group based on the pro-rata portion of the total compensation paid by that member. This change to the group aggregation rule will impact how compensation packages for top executives are structured and could affect payroll tax exposure.
Reporting and Compliance
W-2 Reporting for Tips and Overtime
OBBBA introduces new requirements to separately report qualified tips and FLSA-required overtime compensation on Form W-2s. Tip income will be temporarily deductible (for tax years 2025 through 2028) as an above-the-line deduction for individuals in traditionally and customarily tipped industries on their personal income tax return (Form 1040). The deduction is limited to $25,000 of reported tips. Since this is a deduction rather than an exclusion, tips are still reportable by the employer as taxable income to the recipient employees and remain subject to payroll taxes.
Workers who receive overtime will be eligible for an above-the-line deduction for qualified overtime pay of $12,500 ($25,000 for married joint filers) on their personal income tax return for the tax years 2025 through 2028. This could allow employers to structure employee compensation in a way that increases employees’ take-home pay without raising overall payroll costs.
Employers will need to update payroll systems and processes to comply, as employee eligibility for new deductions will rely on accurate employer reporting of their tips and overtime pay.
Non-Citizen Workers
Employers who hire, sponsor, or employ non-citizen workers should be aware of significant changes under the newly enacted OBBBA. The law introduces new fees and stricter administrative requirements, imposing heightened financial and compliance burdens on employers.
OBBBA imposes new or increased fees on a variety of immigration applications and processes. Many of these fees cannot be waived or reduced. For example, the cost of filing Employment Authorization Documents (EADs) requested by asylum applicants, parolees, and individuals with Temporary Protected Status was anywhere from $0 to $470. Now, the initial filing fee is $550, and a $275 fee is applied for renewals/extensions. These fees are not subject to waiver and are indexed annually for inflation, requiring ongoing financial planning for affected employers and employees.
OBBBA also allocates significant new resources to the Department of Homeland Security (DHS) and Immigration and Customs Enforcement (ICE), with an explicit focus on ramping up I‑9 audits, inspections, and other worksite enforcement actions. Employers may want to evaluate I-9 practices and strengthen oversight of contractors. Employers with a significant non-citizen workforce should plan for increased costs and increased audit and enforcement activity. Employers should also educate affected employees about upcoming changes and take preventive steps to ensure compliance.
Next Steps
With the most significant federal workplace tax and benefit changes in years, it’s essential to prepare in advance for the new landscape. Employers should review benefits, update payroll systems, and consult with legal or tax advisors to prepare for these changes, most of which become effective for plan or tax years beginning after December 31, 2025. It will also be important to reassess existing benefits programs in light of new opportunities under OBBBA, such as expanded tax credits and higher contribution limits, in order to maximize value to both employees and the company. Finally, communication with employees regarding expanded or updated benefit offerings can help improve retention in a highly competitive talent market.
