On July 4, 2025, H.R. 1, the One Big Beautiful Bill Act, was signed into law, and of most significance for NFIB members, it made the 20% Small Business Deduction permanent. The Act, however,  includes two provisions—“no tax on tips” and “no tax on overtime”—that also impact small business owners. Both deductions take effect for the 2025 tax year and expire after the 2028 tax year.

No Tax on Tips

The new law allows employees who “customarily and regularly received tips” to deduct up to $25,000 in tips from their taxable income, so long as they include their social security number on their tax return. In addition, the tip credit has been expanded to include barber shops, nail salons, spas, and esthetics.

The “customarily and regularly received tips” limitation should read to employers as the service industry. In fact, there are a wide range of industries explicitly excluded from the deduction, including health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, trading, or dealing in securities. This limitation is there to make sure that employees in industries where tips are not common practice don’t try to cash in on this deduction. If they do, they will likely be sorely disappointed when it comes time for tax returns. As an employer, it is a good idea to reasonably set your employees’ expectations and only encourage them to take the deduction if they already receive tips.

The deduction also does not apply to non-optional service charges. If a business automatically includes a tip on the bill, it is not tax-deductible. The customer must be able to choose the amount (if any) to leave as a tip.

Though the “no tax on tips” provision will reduce the tax burden on employees, it does not change the paperwork that an employer must file. Business owners must still record and report the tips earned on an employee’s W-2 or a contractor’s 1099. Employers will be required to use a “reasonable method” (to be determined by the Treasury Secretary) to “approximate” the dollar amount of tips. In the meantime, businesses should accurately track employee tips to ensure that employees will receive the deduction no matter which methods of approximating tips is ultimately designated by the Secretary.

No Tax on Overtime

The law also allows for a maximum $12,500 (or $25,000 for joint filers) tax deduction on overtime pay. As with the “no tax on tips” provision, employees will have to include their social security number when they file

The overtime deduction only applies to overtime that is required under federal law, meaning the Fair Labor Standards Act (FLSA). Overtime pay that is required by state law or contract, such as a collective bargaining agreement, does not qualify for the deduction. It also only applies to the amount “in excess of the regular rate”—in other words, if an employer pays an employee $15 an hour regularly, and $22.50 (time and a half) for overtime, the additional $7.50 is eligible for the deduction.

Employees cannot deduct tips they make while working overtime as overtime pay, though they can still deduct those tips under the “no tax on tips” deduction. This prevents employees from cashing in twice on one payment.

As with the “no tax on tips” deduction, employers will still have to report employee overtime hours on a W-2.

State Income Tax/Social Security/Medicare

State taxes, as well as payroll taxes like Social Security and Medicare, will not be affected by the new law. Employees can expect to see these taxes taken from their paychecks as usual.

Best Practices for Employers

A small business owner should make clear to employees that tips are not going “under the table.” It is more accurate to describe “no tax on tips” as a tax deduction rather than an exemption. This is important to ensure that employees and contractors accurately disclose their tips and avoid a paperwork nightmare during tax season.

In addition, business owners should make clear to employees that their entire overtime check is not eligible for the “no tax on overtime” deduction, but rather, only the difference between regular and overtime pay. This will help to meet an employee’s expectations.

More to Come from Treasury

The new law requires the Secretary of the U.S. Department of the Treasury to come up with new procedures and forms for disclosing tips and reporting deductible overtime pay. It also requires the Secretary to, within 90 days, publish a list of occupations that traditionally receive tips under the law.

Businesses should keep accurate records and await further guidance from the government, which should arrive in October or sooner. NFIB will sponsor a webinar to provide members with additional information.

In the meantime, if you have any questions about the new law’s impact on tips and overtime pay, NFIB’s Legal Center is here to help. Please reach out to us at info@nfib.org.

July 16, 2025

This alert does not constitute legal advice. Small businesses may want to consult with a tax attorney or CPA to ensure they are complying with all legal obligations regarding taxes on tips and overtime.