On July 4, 2025, the One Big Beautiful Bill Act was signed into law, bringing significant changes for small business owners. Among the key provisions are "no tax on tips" and "no tax on overtime," both effective for the 2025 tax year through to 2028.
The "no tax on tips" provision allows employees who regularly receive tips to deduct up to $25,000 from their taxable income. This applies only if they include their social security number on their tax return. The tip credit now includes industries such as barber shops and nail salons but excludes sectors like health and law.
Employers should note that this deduction does not apply to non-optional service charges. Tips must be voluntary for them to be deductible. Despite reducing employees' tax burdens, employers still need to report tips accurately on W-2s or 1099s.
The "no tax on overtime" provision offers a maximum deduction of $12,500 for individual filers and $25,000 for joint filers. This deduction applies only to federally mandated overtime pay under the Fair Labor Standards Act (FLSA) and not state-mandated overtime.
State taxes and payroll taxes like Social Security remain unaffected by these new deductions. Employers should communicate clearly with employees about what portions of their income are eligible for deductions.
The U.S. Department of the Treasury is tasked with developing new procedures and forms related to these deductions. Further guidance is expected by October, with NFIB planning a webinar for additional information.
NFIB's Legal Center is available for questions regarding these changes at info@nfib.org.
This alert is informational and does not serve as legal advice. Businesses are advised to consult a tax attorney or CPA regarding compliance with these new laws.
