The One, Big, Beautiful Bill: What ‘No Tax on Tips & Overtime’ Means for Your Business

A significant piece of legislation, the One, Big, Beautiful Bill Act, introduces new tax deductions that could change the financial landscape for many working Americans and the small businesses that employ them. Effective from 2025 through 2028, two key provisions—”No Tax on Tips” and “No Tax on Overtime”—offer substantial tax relief to employees. While directly benefiting workers, these changes will have a ripple effect on small business operations, employee relations, and strategic planning. Understanding these new rules is crucial for any small business owner navigating the coming tax years.

This post will break down what these new deductions mean for you and your business. We will explore the potential benefits, from increased employee satisfaction to new competitive advantages, as well as the challenges, such as new reporting requirements and the need to adjust financial strategies.

The “No Tax on Tips” Provision: A Game-Changer for Service Industries

For decades, tipped employees in restaurants, salons, and other service-based businesses have had their earnings subject to income tax. The new law changes this by allowing employees to deduct their tip income, potentially putting more money directly into their pockets.

How the Deduction Works

This new rule allows eligible employees and self-employed individuals to deduct up to $25,000 in qualified tips each year. “Qualified tips” include voluntary cash or charged tips from customers. To be eligible, the employee must work in an occupation that the IRS recognizes as one that customarily receives tips.

There are some important limitations. The deduction begins to phase out for individuals with a modified adjusted gross income (MAGI) over $150,000, or $300,000 for those filing jointly. This ensures the benefit is targeted toward middle and lower-income workers who form the backbone of the service industry.

Impact on Small Business Operations

For small businesses, this provision presents both opportunities and new responsibilities.

• Increased Employee Satisfaction and Retention: The most immediate benefit is the potential for higher take-home pay for your staff. An employee earning $20,000 in tips annually could see a significant reduction in their tax liability. This can be a powerful tool for improving morale, reducing turnover, and attracting top talent in a competitive labor market. A happier, more financially stable workforce often leads to better customer service and a stronger bottom line.
• A New Competitive Edge: Businesses that effectively communicate this new benefit to their teams may find themselves in a stronger hiring position. You can frame jobs at your establishment as more lucrative than those at competitors who may not be as transparent about this tax advantage.
• New Reporting Requirements: With this deduction comes new administrative duties. Employers must now file information returns with the IRS that report the cash tips received and the occupation of the employee. You will also need to provide statements to your employees with this information. Staying on top of these reporting requirements will be essential to ensure both you and your employees remain compliant. The IRS has promised transition relief for the 2025 tax year to help businesses adapt.

The “No Tax on Overtime” Provision: Rewarding Extra Effort

The second major change is the “No Tax on Overtime” deduction. This provision allows individuals to deduct the premium portion of their overtime pay, directly rewarding employees who work beyond their standard hours.

Understanding the Overtime Deduction

This deduction applies to the extra pay an employee receives for working overtime as required by the Fair Labor Standards Act (FLSA). For example, in a “time-and-a-half” scenario, an employee can deduct the “half” portion of their compensation.

The maximum annual deduction is $12,500 for individuals and $25,000 for joint filers. Similar to the tip deduction, it phases out for taxpayers with a MAGI over $150,000 ($300,000 for joint filers).

What This Means for Your Business

This deduction could influence how small businesses manage scheduling, productivity, and employee compensation.

• Making Overtime More Attractive: Employees may be more willing to take on extra shifts knowing that the premium pay is tax-deductible. This can be a major advantage for businesses that experience seasonal peaks or unexpected surges in demand, such as manufacturing, retail, and logistics companies. It provides a built-in incentive for staff to help cover busy periods.
• Impact on Financial Planning: While the deduction benefits the employee, the employer’s cost of paying overtime remains the same. However, the increased willingness of staff to work extra hours could reduce the need to hire temporary workers, which often comes with its own set of administrative and training costs. Businesses should analyze whether it is more cost-effective to offer overtime to existing staff or to expand their workforce.
• Updated Payroll and Reporting: Similar to the tip provision, businesses will have new reporting obligations. Employers must file information returns and provide statements to employees showing the total amount of qualified overtime compensation paid. Your payroll system will need to be configured to accurately track and report this specific component of an employee’s wages.

Navigating the Changes: A Balanced Perspective

While these new tax deductions offer clear benefits for employees, small business owners must approach them with a clear strategy. The primary challenges are administrative. You will need to ensure your payroll and accounting systems are updated to handle the new tracking and reporting requirements accurately. This may require investing in new software or training your administrative staff.

However, the opportunities are significant. By proactively embracing these changes, you can foster a more motivated and loyal workforce. Highlighting these tax benefits during recruitment can make your business a more attractive place to work. For service-based businesses, a more financially secure team can translate directly into a better customer experience. For industries reliant on overtime, you may find it easier to manage staffing during critical periods.

The key is to be informed and prepared. Consult with your tax advisor to fully understand how these provisions affect your specific business and to develop a plan for compliance. By turning these new regulations into a strategic advantage, you can support your employees’ financial well-being while strengthening your business for the years ahead.

Get Prepared