Payroll, Contractors, and Employees

What is the One Big Beautiful Bill Act?

It is a federal tax law passed in July 2025 that includes new deductions and exemptions, including:

• No federal income tax on up to $25,000 in tips

Subject to a phase out of $100 per $1,000 over AGI limit of $150,000 (single) or $300,000 (joint filers)

• No federal income tax on up to $12,500 in overtime premiums

Subject to a phase out of $100 per $1,000 over AGI limit of $150,000 (single) or $300,000 (joint filers)

Does this mean tips and overtime are completely tax-free?

No.  The exemption applies only to federal income tax.

You still pay:

• Social Security tax (6.2%)

• Medicare tax (1.45%)

• State/local taxes, unless your state makes changes

Will my W-2 look different?

Yes.  Starting with 2025 W-2s (issued in January 2026):

• Tip and overtime income will still be reported.

• New boxes will separate excluded (tax-free) amounts from taxable wages.

What should employers or payroll providers do differently?

Payroll systems must:

• Track cash tips and overtime premium pay separately

• Still include them in FICA (Social Security/Medicare) wages

• Report them properly on Form 941 and the employee’s W-2

How do I know if my tips qualify?

Tips must be:

• Reported to your employer

• Cash or card-based tips (not a service charge)

• Not exceed $25,000 per year ($50,000 for joint filers)

What counts as overtime premium pay?

Only the extra 0.5x portion of time-and-a-half is excluded.

Example: If you earn $20/hour, the extra $10/hour (the 0.5x) is the overtime premium that may be exempt from income tax.

Who qualifies for this tax exemption?

Most tipped workers and hourly employees, especially in:

• Restaurants

• Hospitality

• Retail

• Other hourly wage jobs that receive tips or overtime

Will this reduce my withholding?

Yes, if properly tracked, your paycheck will show less federal income tax withheld—but FICA taxes will still be withheld at normal rates.

Does this affect my Social Security benefits?

No.  Tips and overtime are still subject to payroll taxes and will still count toward your future Social Security earnings record.

When does this apply?

• Applies to wages earned on or after January 1, 2025

• Ends after December 31, 2028

Contact Us

Hiring help in your business? The IRS cares deeply about how you classify workers—and so should you.

W-2 Employees:

• You control how, when, and where they work

• You must withhold taxes, pay employer payroll taxes, and issue a W-2

• Usually receive benefits like vacation, insurance, etc.
  
  

1099 Independent Contractors:

• Work independently, on their own schedule

• Handle their own taxes

• Receive a 1099-NEC if paid over $600
  
  

Misclassification = Penalties

If you treat a contractor like an employee but don’t withhold/pay employment taxes, you could be on the hook for:

• Back taxes

• Penalties and interest

• Potential audits
  
  

Tip: The IRS uses a three-part test: Behavioral, Financial, and Relationship control. When in doubt, talk to a CPA.

Hiring help and unsure how to classify them? Contact Us

Start Strong. Stay Compliant. Let Us Handle the Details.

Hiring your first employee is exciting—but it also means stepping into a new world of compliance, paperwork, and deadlines. Payroll is one area where small mistakes lead to big penalties.

Here’s what you need to know to get it right from the start—and why so many small businesses trust us to take payroll off their plate.

Step-by-Step Payroll Setup:

1. Apply for an EIN

This IRS-issued number identifies your business for tax purposes. We’ll help you apply quickly and correctly.

2. Register With Your State

You’ll likely need to sign up for state income tax withholding, unemployment insurance, and new hire reporting. We can guide you through all of it—or handle the registrations for you.

3. Gather the Right Employee Forms

• W-4 for federal income tax

• State withholding forms (if applicable)

• I-9 for work authorization

• Direct deposit setup

We’ll walk you through exactly what you need to collect and when.

4. Pick a Payroll Schedule

Weekly, biweekly, or semimonthly—each has pros and cons. We’ll help you choose the best fit for your cash flow and state law.

5. Choose a Payroll System That Works

We offer simple, accurate payroll that includes:

• Direct deposit for employees and contractors

• Federal and state tax filings (941s, 940s, W-2s, etc.)

• Year-end reports

• Ongoing support

Contact Us for your payroll needs.

Don’t Let Simple Payroll Mistakes Cost You Thousands

Payroll tax penalties are some of the most common—and costly—IRS problems for small businesses. Fortunately, they’re easy to avoid with the right systems in place.

At Specialty Bookkeeping, we help you stay fully compliant and penalty-free with hands-on payroll support. Here’s what to watch for—and how we help you stay ahead.

Common Payroll Penalties We Help You Avoid:

• Late tax deposits result in a penalty of use to 15% of the unpaid amount.

• Missing 941 or 940 filings result in a penalty of $50+ per form, plus interest

• Misclassifying workers can result in a penalty of back taxes + interest + further IRS scrutiny

• Incorrect W-2s can result in penalties ranging from $60-$300 per form

How We Keep You Compliant:

1. We File Everything on Time

We handle all required filings—Forms 941, 940, W-2s, state returns—so you never miss a deadline.

2. We Help Classify Workers Correctly

Unsure whether someone should be a W-2 or 1099? We’ll assess the IRS’s rules and keep you out of trouble.

3. We Track Everything for You

From hours and withholding to payroll taxes and deposits—we keep your records clean, organized, and audit-ready.

4. We’re Easy to Reach

Have a question? You can call us directly. No ticket system. No software walkthroughs. Just real answers from your CPA.

Bottom Line:

Payroll is too important to guess on. Whether you’re paying yourself, your first employee, or a growing team—we make sure it’s done right.

Let us handle your payroll so you can focus on running your business. Contact Us today.