New Law, Big Wins: What You Need to Know about OBBBA

06 Aug New Law, Big Wins for Small Businesses: What You Need to Know about OBBBA

Posted at 13:46h in Financial News by Angie Noll

On July 4, 2025, the “One Big Beautiful Bill Act” (OBBBA) was signed into law, and it brings some major perks for small business owners.

Among the most impactful changes for our clients is this:

The Small Business Income Deduction is now permanent…

…AND it’s been increased to 23% (up from 20%).

This allows many pass-through businesses (including Sole Proprietorships, Partnerships, S Corps, and LLCs that are taxed as any of the previous entities) to deduct 23% of their qualified business income before calculating their income tax. Since your taxable income is lowered, your taxes will be less. That’s huge for planning, budgeting, and breathing a little easier during tax season.

But that’s not all—let’s break down two more big updates that might affect your team:

“No Tax on Tips” – What It Really Means

Some headlines make it sound like tips are now totally tax-free. That’s not quite the case.

What’s really happening?

You now get a deduction for tips paid to employees, but those tips still need to be reported by your team and tracked in payroll. It’s a tax deduction—not a tax exemption.

So who qualifies as a “tipped worker”?

Here are common roles where this could apply:

Restaurant servers
Delivery drivers
Hairstylists
Nail technicians
Dog groomers
Entertainers
Movers
Valet drivers
Nannies or babysitters
Hospitality staff (hotels, resorts)

Important: Make sure your employees know that tips still need to be tracked. “Under the table” reporting is a quick way to run into big headaches during tax season.

What Is the Tip Credit?

Under the Fair Labor Standards Act (FLSA), employers in industries where tipping is customary (like restaurants, salons, and hospitality) are allowed to pay tipped employees less than the full minimum wage, as long as tips make up the difference.

This difference is called the tip credit.

Tip Credit Example (Federal):

Federal minimum wage: $7.25/hour
Tip credit: Up to $5.12/hour
Cash wage employer must pay: $2.13/hour
The employee must earn enough in tips to bring their total hourly wage to at least $7.25/hour.

If not, the employer must make up the difference.

Note: Many states (like Illinois, California, New York) have stricter rules—higher minimum wages or no tip credit at all. Always follow the stricter of state vs. federal.

How Does This Tie into the One Big Beautiful Bill?

The One Big Beautiful Bill adds a temporary above-the-line deduction for tips paid to employees, but this doesn’t change the fundamentals of tip reporting or tip credit rules. Here’s the difference:

What’s New:

Employers can now deduct tips paid to employees, up to $25,000 per worker, if the employee earns less than $150,000/year.
It’s a business deduction, not a tax exemption for the employee.
Tips still must be tracked and reported through payroll.
Employees still pay income and payroll taxes on tip income.
Employers must still comply with all FLSA tip credit requirements if they use the credit.

How Tip Credit and the New Deduction Work Together

Let’s say:

You use the tip credit (pay $2.13/hr)
Your employee earns $100/day in tips
You properly report tips through payroll

You can now deduct that $100/day in tips as a business expense (up to the $25,000 cap per worker) under the new law.

But you must:

Keep accurate payroll and tip records
Ensure employee is earning at least the full minimum wage when combining base pay + tips
Continue complying with local/state wage laws

Key Compliance Reminders

Tips still count as employee income (they pay income tax).
You must report and withhold taxes on tips through payroll.
Don’t confuse this new deduction with tip pooling or tip credit exemptions—those are different tools.

“No Tax on Overtime” – What’s Really Deductible?

Under the One Big Beautiful Bill Act, the so-called “No Tax on Overtime” provision is not a blanket exemption from tax. It’s actually a deduction for employers, and only on part of the overtime wages.

Here’s a clear breakdown:

What’s Really Deductible Under the “No Tax on Overtime” Rule?

It’s a deduction for employers—not a tax break for employees.

Employers can now deduct the overtime premium paid to qualifying employees. This applies to:

Employees earning less than $150,000/year (or $300,000 for joint filers)
Overtime pay that meets Fair Labor Standards Act (FLSA) criteria

So What Exactly Is Deductible?

Only the extra pay for overtime—the “premium” above regular wages.

Example:

Regular hourly wage: $20/hour
Overtime wage (time and a half): $30/hour
Deductible amount = $30 – $20 = $10/hour

That $10/hour premium is what you can deduct—not the full $30/hour overtime rate.

What’s NOT Deductible:

Regular wages (you already deduct these as part of normal payroll)
Entire overtime wages (only the premium portion is eligible)
Overtime paid to high earners above the income limits

Important Compliance Notes:

The overtime must meet FLSA rules: Generally, time worked beyond 40 hours per week by a non-exempt employee.
You must have accurate time tracking and clear wage records.
This is a temporary provision, available from 2025 through 2028.

Best Practices for Employers:

Audit payroll systems to ensure overtime is calculated and split (regular vs. premium pay)
Ensure employee classifications are correct (exempt vs. non-exempt)
Keep records that show hours worked, wages paid, and overtime breakdowns

Best Practices for Business Owners

Clarify with employees: Tips aren’t tax-free, but you now get a deduction. Make sure your team is tracking and reporting everything.
Set clear expectations: Overtime deductions apply only to the additional pay, not the entire overtime paycheck.
Work with your bookkeeper to track these deductions accurately throughout the year—not just at tax time.

Auto Loan Interest Deduction

Buying a U.S.-assembled vehicle for your business? You may deduct up to $10,000/year in interest (2025–2028).

1099-K Rule Reversed

Got side gigs or client payments through PayPal or Venmo? The $600 reporting threshold is gone. The old $20,000/200 transaction rule is back.

Child and Dependent Care Breaks

Two boosts for working parents:
• Credit increased from 35% to 50%
• Tax-free dependent care benefits from employers now capped at $7,500 (up from $5,000)

Want to know if these changes apply to you?

We’re happy to help you break it down for your specific situation. Let’s talk about how to maximize your deductions and keep everything clean and compliant.