Over the July 4th weekend, while many of us were firing up the grill, headed out on the boat or just battling traffic — the federal government was lighting a legislative firework of its own.
Enter: the “One Big Beautiful Bill Act” — yes, that’s the real name — signed into law by President Trump on July 4. While headlines will focus on the politics, we’ve been focused on the numbers — and no surprise given our seasonal hospitality and service culture here on Olde Cape Cod, there are two new deductions that have already gotten a lot of buzz and you’re going to hear a lot more about:
- No tax on tips, and
- No tax on overtime.
We’ve unpacked the details so you can see what’s real, what’s murky, and what it might mean for your business.
First: What’s Actually in the Law?
Two new above-the-line deductions were introduced, both aimed squarely at wage earners in tipped and hourly roles — but both with implications for the businesses that employ them.
No Tax on Tips
Starting in 2025, employees who work in “customary tipped occupations” can deduct up to $25,000 per year in cash tips from their federal taxable income.
What qualifies as a tip?
- Voluntary (not mandatory service charges)
- Paid in cash, card, or tip pool (no gift baskets or movie tickets)
- Received in a qualified industry — think servers, bartenders, barbers, etc.
(The Treasury will publish a list to clarify who qualifies.)
What doesn’t qualify?
- Tips in fields like law, accounting, consulting, and financial services
- Mandatory gratuities or service charges
- Reclassified income passed off as tips
For employers, this means:
- New W-2 reporting requirements: Employers will need to break out tip totals and note the employee’s qualifying occupation.
- Reexamining tip pool arrangements: Some may expand tipping culture to boost employee income — but rules around tip-sharing remain strict.
- Watch for state complications: State tax treatment may not follow the federal lead.
No Tax on Overtime
Employees who earn overtime under the Fair Labor Standards Act (FLSA) can now deduct up to $12,500 annually ($25,000 if married filing jointly) of their overtime pay.
What qualifies?
- Overtime pay that’s required by the FLSA
(Think: time-and-a-half after 40 hours/week — not employer-specific or union-negotiated extras)
What doesn’t qualify?
- Overtime created creatively (e.g., “double time after 30 hours” not required by FLSA)
- Attempts to restructure base pay to make everything “overtime”
For employers, this means:
- Separate overtime reporting on W-2s starting in 2025
- New record-keeping standards for tracking FLSA-qualified overtime vs. other wage categories
- Avoiding risky workarounds: Creative payroll tactics (like turning salaried employees into “low wage hourly + inflated overtime”) could backfire badly.
So… Is This Good for Business Owners?
At first glance, these deductions are employee-facing — and yes, they’re meant to boost worker take-home pay. But savvy business owners know that anything affecting your team affects your business. Here’s where it gets interesting:
Potential Upside for Employers:
- Higher Morale = Higher Retention
More money in employees’ pockets means happier team members — and less churn. - More Overtime = More Productivity
Employees may be more willing to work extra hours when their net pay gets a boost. - Competitive Edge in Hiring
Tipped and hourly workers may gravitate toward businesses that embrace these new structures transparently and fairly. - Room to Rethink Tip Strategy
Restaurants and service businesses may see more generous tipping, which could create space to expand tip pools or redistribute labor costs.
But Tread Carefully
These new deductions come with strings — and the last thing you need is an audit because you restructured compensation too creatively.
- The IRS still expects 100% of tips to be reported.
- “Creative” payroll restructuring could trigger penalties if it doesn’t align with FLSA standards.
- You’ll need updated payroll systems to track and report this accurately — especially if you’re issuing many W-2s.
And remember: These deductions expire after 2028. So any changes you make should be flexible, reversible, and grounded in long-term thinking.
What You Should Do Now
If you run a business in the hospitality, service, or trades space, here’s what we recommend:
- Don’t rush into restructuring comp plans or tip models until the Treasury releases its guidance.
- Review your payroll reporting setup to prepare for W-2 compliance in 2025.
- Start conversations with your team — transparency now will pay dividends later.
- Talk to your advisors (that’s us!) to understand the downstream effects.
Final Thought
At SPM & Co, we know that the best business decisions are rarely reactive. They’re informed, intentional, and timed for maximum long-term benefit. These new deductions may sound simple — but in practice, they’ll require structure, discipline, and insight to use wisely.
We’re here to help you unpack the changes, understand your options, and chart a smart path forward.
As always, we’re focused on helping you reclaim your time, lead with confidence, and grow intentionally.