Below is a practical guide to what the deduction is, who qualifies, how to report it, and how it affects (and does not affect) Social Security and Medicare taxes.

If you want to deep dive into the topic, see IRS Notice 2025-69 HERE

Key takeaways (the TL;DR version)

• The “No Tax on Overtime” benefit is a federal income tax deduction for tax years 2025–2028.
• It applies to the overtime premium, the “extra” pay above your regular rate.
• The maximum deduction is $12,500 (or $25,000 if Married Filing Jointly), with a phaseout starting at MAGI over $150,000 (or $300,000 MFJ).
• You claim it on Schedule 1-A (Form 1040), Part III, and it flows to Form 1040, line 13b.
• This deduction can reduce income tax, but it does not reduce Social Security and Medicare (FICA) taxes on your wages.

What is the 2025 overtime deduction?

For tax year 2025, federal law created a new deduction for qualified overtime compensation. In general terms, it lets eligible workers deduct the portion of overtime pay that exceeds the regular rate of pay, but only when that overtime is required under federal overtime rules (FLSA, section 7).

What counts (and what doesn’t)

For many hourly workers, overtime is paid at 1.5× the regular rate. The extra 0.5× is the “premium” portion. The deduction generally targets that premium portion, not your entire overtime line item.

Also, if your employer pays extra amounts that are not required by the FLSA (for example, “double time” by company policy, holiday premiums, or certain state-law-only premiums), only the FLSA-required premium is potentially “qualified.” Amounts above the FLSA-required premium generally do not qualify.

Who qualifies for the overtime deduction?

You may qualify if:

1) Your overtime is “FLSA-required” overtime

In general, the overtime must be required under the Fair Labor Standards Act (FLSA) (for many roles, that’s overtime for hours worked over 40 in a workweek, subject to the FLSA’s exemptions and special rules).

If you’re not eligible under FLSA (an “FLSA-ineligible” employee) but still receive overtime or premium pay because of state law or employer policy, that overtime is generally not “qualified overtime compensation” for purposes of this deduction.

2) You meet the income limits (phaseout)

The deduction is capped and then reduced based on modified adjusted gross income (MAGI):

• Cap: $12,500 per return ($25,000 if Married Filing Jointly)
• Phaseout begins when MAGI exceeds $150,000 (or $300,000 MFJ)
• MAGI is based on your AGI with certain add-backs (shown on Schedule 1-A), such as certain foreign earned income and certain Puerto Rico exclusions.

3) You meet the filing and ID requirements

• You must have a valid Social Security number to claim the deduction.
• If you’re married, you must file Married Filing Jointly to claim it. It is not available for Married Filing Separately.

How to report the overtime deduction on your 2025 tax return

Step 1: Determine your “qualified overtime compensation”

For 2025, many taxpayers will need to use payroll records to compute the qualified amount. In plain language: your W-2 may not neatly label “qualified overtime,” so you may need to use pay stubs or a year-end payroll summary to isolate the overtime premium portion.

Practical tip: If your employer provides a qualified overtime number in W-2 box 14 or a separate statement, that may simplify your work, but it may not be there for 2025.

Step 2: Complete Schedule 1-A (Form 1040), Part III

You claim the deduction on Schedule 1-A (Form 1040), Part III: “No Tax on Overtime.”

You’ll generally:

• Enter qualified overtime compensation included in Form W-2, box 1 (and/or certain 1099 amounts, if applicable)
• Apply the $12,500 / $25,000 cap
• Apply the MAGI phaseout calculation
• Carry the result to Form 1040 / 1040-SR, line 13b

Step 3: Keep records with your tax files

Because 2025 is a transition year for reporting, it’s especially important to retain documentation (year-end payroll summaries, final pay stubs, employer statements, etc.) supporting how you computed the qualified overtime amount.

How this impacts income tax vs. Social Security and Medicare taxes

This is the part that causes the most confusion.

It can reduce federal income tax

This overtime benefit is an income tax deduction (claimed on your Form 1040). It reduces the income used to compute your federal income tax and it’s available whether you itemize or take the standard deduction.

It does not reduce Social Security or Medicare (FICA) taxes

Even if you qualify for the deduction, your overtime pay is still wages for payroll tax purposes. Social Security and Medicare taxes are generally assessed and withheld through payroll on wages you earn. Claiming an income tax deduction on your return does not retroactively change the payroll taxes that applied to those wages.

What you’ll likely see in real life:
Your paychecks may still show Social Security/Medicare withholding on the full wage amount (including overtime). The benefit of the overtime deduction typically shows up when you file your return often as a lower balance due or a larger refund than you would have had otherwise (depending on your overall situation).

Common questions (FAQ)

Is all my overtime “tax-free” now?

No. The rule is a deduction, and it generally targets the overtime premium portion required under federal overtime law. Payroll taxes and other taxes can still apply.

Do I have to itemize to take this deduction?

No. This deduction is generally available whether you itemize or not.

What if my W-2 doesn’t show a separate overtime number?

This may be quite common for 2025. You may need to use pay stubs and other payroll documentation to compute the qualified amount.

I’m paid “double time” for some overtime. Does that mean I deduct all of it?

Not necessarily. Amounts above the FLSA-required overtime premium generally do not qualify, even if they’re paid as a company benefit.

Next steps: what to do now (so filing is easier later)

1. Save your 2025 pay stubs and year-end payroll summary (especially anything showing an overtime premium amount).
2. If you worked for multiple employers, keep records for each job.
3. If you’re unsure whether your overtime is FLSA-required, consider asking your employer or payroll department what portion is the FLSA overtime premium.

How High Impact CPA can help

If you worked substantial overtime in 2025, the value of this deduction can be meaningful, but eligibility and calculation details matter. High Impact CPA can help you:

• Confirm whether your overtime appears to be FLSA-qualified
• Reconstruct the deductible overtime premium from payroll records (especially for 2025 transition reporting)
• Evaluate whether withholding updates make sense for 2026 and beyond

Want to make sure you get every deduction you can for 2025? Schedule a call with High Impact CPA today.

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Disclaimer

This article is for general informational purposes only and is not tax, legal, or financial advice. Tax outcomes depend on your individual facts and circumstances. Consult a qualified professional regarding your specific situation.

The post The 2025 “No Tax on Overtime” deduction: what it is, who qualifies, and how to report it. appeared first on High Impact CPA.

Do I Even Need Clean Books?

If you run any kind of business having clean books should be a priority. If your accounting records aren’t in order you are going to have a much harder time making effective business decision.

When it comes time to expand the business, you’ll find lenders and investors aren’t going to be as “keen” on you if you show up with bad records.

And of course… you need clean books to file your taxes, or at least file them accurately. Imagine having duplicate income transactions and paying tax on money you didn’t actually make… yuck!

Red Flags You Have Messy Books

• No supporting documentation kept for transactions.
• Bank accounts haven’t been reconciled in ages.
• Negative balances on the balance sheet.
• Payroll liabilities don’t match payroll reports.
• Anything in the “Opening Balance Equity” account.
• Strange trends month-over-month that make no sense.
• Business looks profitable but cash is bleeding.
• Lack of a monthly systematic process.

Before You Start: Gather Your Documents

The first step to successful bookkeeping cleanup is preparation. Having all your documentation ready before you begin will make the process significantly faster and less frustrating. Don’t skip this step as it’s the foundation of everything that follows.

Set aside adequate time for this project. A thorough clean-up typically requires several focused sessions rather than one quick afternoon. Plan for interruption-free blocks of time where you can concentrate.

Essential Documents Checklist

• Bank statements for every month you’re reviewing.
• Credit card statements for all business cards.
• Fixed asset purchases (typically tangible property >$2,500)
• Loan statements if you have business loans.
• Complete payroll reports if you run payroll.
• Equity documents such as capitalization tables or partnership agreements.
• Sales platform reports from Stripe, Square, Shopify, Amazon, or PayPal.

Create Your Clean-Up Plan

Decide which months you’re fixing (typically follows a tax year). Pick your start and end dates. Always fix the oldest month first, then move forward chronologically. Never skip around or jump between months.

Separate Personal & Business Funds

Create Your Clean-Up Plan

Decide which months you’re fixing (typically follows a tax year). Pick your start and end dates. Always fix the oldest month first, then move forward chronologically. Never skip around or jump between months.

Separate Personal & Business Funds

This is critical if you have not done this yet. Your business funds should always be separate from your personal funds. This makes:

1. The accounting much easier since you don’t have to go in and identify business vs. personal transactions every period.
2. It helps protect your personal assets should anything go wrong in your business by helping to maintain the “corporate veil.”

Simplify Your Chart of Accounts

Review your account list for common problems: duplicate accounts (like “Auto Expense” and “Vehicle Expense”), too many unused random accounts, or large balances stuck in “Uncategorized” or “Ask My Accountant.” Combine duplicates carefully and keep categories simple.

Remember, the whole purpose of your chart of accounts is to allow you to use your books to make better business decisions, so keep that the focus.

Reconcile Bank & Credit Card Accounts

This is the most important step. Make sure that your bookkeeping cash matches your actual bank balance. If cash is correct, you have solved the majority of your issues.

At the start of each month, make sure that your beginning balance in your bank register matches the bank statements, and then reconcile the month from there. Check off every transaction that cleared the bank during the period until the ending balance in the register matches the statements.

Note any transactions in transit such as outstanding checks or incoming transactions which may cause a difference between the bank and book balances.

Any other unreconciled differences should fall each month and can be investigated and corrected.

Reconcile Other Balance Sheet Accounts

This is the same process as reconciling your bank accounts, but the supporting documentation may be a little different. For example, if you have any loan balances outstanding you may need to use an amortization table from your lender to bifurcate principal and interest payments.

Common Balance Sheet accounts to be reconciled:

• Accounts Receivable
• Inventory (match to physical counts)
• Fixed Assets
• Undeposited Funds
• Accounts Payable
• Payroll Liabilities
• Loans & Leases
• Equity Accounts

Review Trends

With your balance sheet in order now you can focus on the profit & loss.

Run your profit & loss report for the year by month and look for variances across different periods. Investigate any that look unusual to you. This will help identify misclassified transactions or transactions potentially recorded in the wrong period.

For example, expenses such as Rent should be pretty consistent month over month, whereas some costs such as utilities may be expected to be larger in summer or winter months.

Reclassify Expenses

If you have any expenses that are misclassified or booked to “uncategorized” or “ask my accountant” now is the time to put those in the proper place.

Not everything needs to be 100% perfect so as we say “never step over a dollar to pick up a dime.” If you have a transaction sitting out there for $1.50 that’s in the wrong place, its probably not worth your time fixing.

(In the audit world we call this “materiality.”)

Mop up Other Misc. Items

Now that you have a clean P&L you can finish up by running through some of those other pesky bookkeeping items that get overlooked. Clean up any duplications in your:

• Products & Services List
• Customer List
• Vendor List
• Inactivate Stale Items
• Update Invoice Templates

Wasting too much time trying to DIY? We can help.

Here’s the truth. All of the slides before this are correct in their information. But actually getting the work done can involve long hours and a lot of frustration for you to get to a clean set of books. Your job as a business owner is to run and grow the business. Taking time to put your accounting records together is a major opportunity cost.

The good news is our team at High Impact CPA cleans up messy books all of the time and put the ongoing systems in place to make sure you don’t have to stress about your numbers again. If you want to get bad books out of your life forever, feel free to reach out to us anytime and we can do the heavy lifting.

BOOK A FREE CONSULTATION CALL

The post How to Clean Up Your Bookkeeping: A Step-by-Step Guide appeared first on High Impact CPA.

Spotting these schemes can sometimes be difficult simply because of the implicit trust we place in these types of people. It is important to always maintain a mindset of skepticism when it comes to safeguarding your hard earned money. I put together a quick video on red flags that you should look out for and how to protect yourself from falling prey to these particular types of fraudsters.

Check out our latest video on how to spot affinity fraud and how to avoid becoming a victim.

Want help increasing your profits, cash flows, and minimizing your taxes?

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For many closely held businesses, electing to be taxed as an S corporation is presented as an obvious way to reduce taxes. There is some truth to that idea. When used in the right circumstances, S corporation taxation can produce meaningful savings in self-employment taxes each year.

However, the election is not automatically beneficial. It introduces new costs, additional compliance obligations, eligibility constraints, and technical rules that affect how income and losses are treated. The real question is not whether S corporation status is popular or frequently recommended, but whether it leaves you better off after considering both the benefits and the burdens in your specific situation.

The purpose of this article is to outline, in practical terms, what an S election does, where the potential tax savings come from, what the eligibility requirements are, and what tradeoffs and risks you take on when you choose this path. By the end, you should have a clearer sense of when an S corporation can be a strong planning tool, and when it may be better to retain your current tax classification.

1. What an S Corporation Election Actually Is

An S corporation is primarily a tax classification, not a specific type of legal entity under state law. You can form an LLC or a corporation at the state level, then elect to have that entity taxed as an S corporation for federal income tax purposes by filing Form 2553, provided certain eligibility requirements are met.

In other words, the S election does not change your underlying state law entity. Instead, it changes how the IRS treats the entity for federal tax purposes. It affects how income flows through to you, how you are compensated, which taxes apply, and how certain technical rules, such as basis and passive loss limitations, are applied.

Without an S election, a single member LLC is typically taxed as a sole proprietorship, and a multi member LLC is generally taxed as a partnership, unless another election has been made. With an S election, the same underlying LLC or corporation is treated as an S corporation for federal tax purposes and must follow the rules that apply to that status.

2. Eligibility Requirements for S Corporation Status

Not every entity or ownership structure can elect to be taxed as an S corporation. The Internal Revenue Code limits S corporation status to entities that meet specific criteria. If those criteria are not met, or later cease to be met, the S election can be invalid or can terminate.

In general terms, an S corporation must be a domestic corporation or an eligible entity that can elect to be treated as a corporation for tax purposes. It must have no more than a prescribed maximum number of shareholders. In addition, only certain types of shareholders are allowed. Typically, eligible shareholders include United States individuals, certain estates, and specific types of trusts. Partnerships, corporations, nonresident alien individuals, and many types of entities cannot be shareholders of an S corporation.

An S corporation can have only one class of stock for tax purposes. In this context, one class of stock means that all outstanding shares confer identical rights to distributions and liquidation proceeds. Differences in voting rights may be permitted, but differences in rights to distributions or liquidation proceeds can create a prohibited second class of stock. If that occurs, the entity may fail to qualify as an S corporation.

There are also rules regarding the type of corporation. Certain financial institutions, insurance companies, and other specialized entities are not eligible to elect S corporation status. In addition, S corporations generally must use a permitted tax year, often the calendar year, unless they qualify for and obtain permission to use a different year.

These eligibility rules are not simply a one time hurdle at the moment of election. They must continue to be satisfied on an ongoing basis. For example, if stock is transferred to an ineligible shareholder, or if the corporation inadvertently creates a second class of stock through unequal distribution rights, the S election can terminate. That would result in the entity being taxed under different, potentially less favorable rules, often as a C corporation, from that point forward.

Because of these constraints, it is important to confirm that your ownership structure, investor plans, and legal documents are compatible with S corporation rules before filing Form 2553, and to monitor those items over time.

3. Where the S Corporation Tax Savings Come From

For sole proprietors and partners in most partnerships, business profit is generally subject to both income tax and self-employment tax. Self-employment tax is how Social Security and Medicare are funded for self-employed individuals.

When your entity is taxed as an S corporation and you are actively working in the business, the tax system begins to view you in two roles. First, you are an employee who receives a W-2 salary. Second, you are an owner who receives distributions of profit. This is the core structural change.

Your W-2 salary is subject to payroll taxes, which cover Social Security and Medicare. The S corporation and you, as the employee, each pay a portion of these taxes. However, the profit that is distributed to you as an owner, above that salary, is generally not subject to self-employment tax. It is still subject to income tax, but the self-employment tax component is not applied to that portion.

The potential savings arise when the business generates profit above what would be considered a reasonable salary for the services you provide. For example, if your business generates $150,000 of profit and a reasonable salary for your role and hours is $80,000, then in an S corporation structure you might pay payroll taxes on the $80,000 salary, while the additional $70,000 would typically be treated as a distribution not subject to self-employment tax. The difference between paying self-employment tax on the full $150,000 versus paying payroll tax on only $80,000 is where the benefit arises.

Those savings can be significant over time. However, they must be weighed against the additional costs, complexity, eligibility constraints, and risks that come with S corporation status.

4. The Costs and Compliance Obligations of an S Corporation

The tax savings described above are not automatic. They come with a set of requirements and administrative obligations. To determine whether an S election makes sense, these items must be part of the analysis.

Once you elect to be taxed as an S corporation and you are actively involved in the business, the IRS expects the corporation to pay you a reasonable salary for the work you perform. That usually means you must implement a payroll system, withhold and remit payroll taxes, file quarterly and annual payroll reports, and issue W-2s at year end.

Reasonable compensation is an area of particular focus for the IRS. If an owner pays themselves a salary that is unreasonably low relative to their responsibilities, hours, and the profitability of the business, the IRS can reclassify distributions as wages on audit. That reclassification may result in additional payroll taxes, penalties, and interest. Determining a reasonable salary often involves looking at industry norms, the nature of your role, your experience, and the financial performance of the business. It is not a precise science, but it is also not a number that should be chosen arbitrarily.

An S corporation is required to file its own income tax return on Form 1120-S. The entity issues a Schedule K-1 to each shareholder, reporting their share of income, deductions, and other items. This is in addition to any personal returns you file. In practice, most owners engage a tax professional to prepare the S corporation return, handle payroll filings, and coordinate state-level requirements. This typically increases tax preparation and advisory costs compared with a simpler Schedule C or partnership filing.

State tax treatment of S corporations varies. Some states recognize S corporation status, others do not. Certain states impose additional taxes, franchise fees, or minimum taxes on entities that are taxed as corporations, including S corporations. These state-level costs and rules can reduce or, in some cases, eliminate the net benefit of an S election. As part of a proper analysis, it is important to understand how your state and any other relevant states treat S corporations and the underlying entity.

An S corporation adds a layer of structure to your business. That can be positive, but it also creates more opportunities for mistakes. Common problem areas include mixing personal and business funds, failing to follow corporate or LLC formalities, late or incorrect payroll filings, and missing deadlines for making or maintaining the S election. Each of these issues can result in penalties or, in more severe cases, challenges to your S corporation status. The additional administrative burden is a real cost that should be considered alongside tax savings.

5. Passive Loss Rules, Basis, and Other Technical Considerations

Beyond the visible items such as payroll and tax return filings, an S corporation election affects how certain technical tax rules apply to you. These may be particularly important if you own multiple businesses, have rental real estate, or have suspended or carryforward losses.

The distinction between passive and nonpassive income affects whether you can use losses from one activity to offset income from another. In many cases, income from an S corporation in which you materially participate is considered nonpassive. If you do not materially participate, or if your involvement changes, classifications can shift. If you have passive losses from rentals or other investments that you plan to use to offset business income, or if you have losses in one activity that you rely on to reduce taxable income in another, an S corporation structure may change how those rules apply. In some cases, it can limit your ability to currently use certain losses, which is effectively a cost.

Shareholder basis in an S corporation is another important concept. In general, you can receive distributions from an S corporation tax free up to your basis. If distributions exceed basis, that excess can trigger taxable gain. Similarly, your ability to deduct losses is limited by your basis and at risk rules. The mechanics of basis in an S corporation differ from those in a partnership, particularly in how debt is treated. If you anticipate significant losses, shareholder loans, or frequent large distributions, these rules should be clearly understood before you elect S corporation status.

6. Inflexibility in Allocating Income and Distributions

Another important distinction between S corporations and entities taxed as partnerships is the relative inflexibility of allocations and distributions.

By design, an S corporation has only one class of stock for tax purposes. That means all shares must have identical rights to distributions and liquidation proceeds. As a practical matter, this leads to a requirement that income, loss, and distributions are generally allocated strictly in proportion to ownership percentage, and typically on a per share, per day basis throughout the year.

In a typical multi owner S corporation, if one shareholder owns 60 percent of the stock and another owns 40 percent, then, absent very specific elections, income, losses, and distributions are expected to follow the same 60 to 40 pattern. If the corporation begins making distributions that routinely favor one shareholder over another, it can raise two concerns. First, it may create tension among owners if the economic arrangement does not match expectations. Second, it can raise questions about whether there is effectively a second class of stock, or whether some distributions should be recharacterized.

In contrast, entities taxed as partnerships, including many multi member LLCs, can often provide more flexible economic arrangements. Partnership agreements can permit special allocations of income, loss, and distributions that do not strictly track ownership percentages, so long as those allocations meet certain tax standards. That flexibility can be very valuable when owners contribute different amounts of capital, assume different levels of risk, or expect to share profits in a way that deviates from simple ownership percentages.

Because S corporations lack this flexibility, they can be a less suitable choice in situations where owners want to vary profit sharing arrangements over time or tailor distributions to individual cash needs. For example, if one owner is active in the business and another is primarily a financial investor, or if owners plan to adjust their economic sharing ratios as capital is contributed or repaid, a partnership structure may be more adaptable. Similarly, if owners anticipate frequent changes in ownership percentages, redemptions, or complex buyouts, the rigid allocation rules for S corporations can create complexity.

This rigidity does not mean S corporations are inherently inferior. It does mean that they are better suited to ownership groups that are comfortable with pro rata allocations and distributions, and that do not require the kind of tailored economic arrangements that partnership taxation can support.

7. When an S Corporation Election Often Makes Sense

There are several common scenarios where an S corporation election is worth serious consideration.

First, your business should have consistent profit above what would be considered a reasonable salary for your role. The key driver of benefit is the spread between reasonable compensation and total profit. If the business only occasionally generates extra profit, or if that spread is small, the savings may not justify the added complexity.

Second, you should be willing to maintain accurate books and records and to run proper payroll. An S corporation works best in an environment where accounting and compliance are handled systematically, either internally or with professional support.

Third, your broader tax picture should be considered. If you do not rely heavily on passive loss utilization, and your structure is relatively straightforward, the path from S corporation savings to net benefit is usually clearer. If, on the other hand, you have multiple entities, significant rental real estate, or complex loss carryforwards, the analysis can still support an S election, but it should be performed carefully.

Fourth, your ownership structure should either be simple, or should fit within S corporation eligibility rules without strain. If you have a small group of individual owners who are comfortable with pro rata allocations and distributions, and who do not require complex special allocations, an S corporation can work well.

Finally, your level of profit should be sufficient to absorb higher professional and compliance costs without those costs erasing the benefit. In other words, the projected annual self-employment tax savings, after payroll, tax preparation, state fees, and administrative time are accounted for, should still be comfortably positive.

8. When an S Corporation Election May Not Be Appropriate

There are also situations where an S election is often not the best choice, or at least not yet.

If your business has low or highly inconsistent profit, the potential tax savings may be small or unpredictable. The fixed cost of payroll systems, tax preparation, and compliance can outweigh the benefit in those circumstances.

If you are still in the early stages of validating your business model, frequently changing directions, or experiencing substantial volatility in income, it may be more prudent to keep the tax structure simple until your operations and profitability are more stable.

If you have a strong aversion to administrative work and do not plan to engage professional support, the added complexity of an S corporation can create significant stress and increase the risk of compliance issues. In that case, any theoretical tax savings may not justify the practical burdens.

If your tax strategy relies heavily on particular passive loss rules, multi entity planning, or other advanced structures, an S election can interact with those strategies in ways that are not obvious at first glance. In those cases, an election should only be made after a detailed analysis.

Finally, if your ownership group requires flexibility in allocating income and distributions in a way that does not simply follow stock ownership percentages, or if you anticipate bringing in investors who would not qualify as S corporation shareholders, a structure taxed as a partnership may be a better fit.

9. The Real Decision Rule: Does the Benefit Exceed the Cost?

At its core, the S corporation decision is a cost benefit analysis. It should not be based solely on the idea that S corporations are generally tax efficient. Instead, the analysis should quantify the expected self-employment tax savings, then subtract the cost of payroll processing and payroll tax compliance, the additional cost of tax preparation and advisory work, any incremental state level fees or taxes related to your structure, the practical cost of your time and the added complexity of the structure, and any strategic downsides, such as reduced flexibility in using losses or allocating profits among multiple owners.

If, after this analysis, the net benefit is small, highly sensitive to changes in profit, or dependent on aggressive compensation assumptions, the election may not be appropriate. If the net benefit is clearly positive, reasonably stable from year to year, and compatible with your broader tax and business goals, then an S corporation election may be a strong option.

10. Steps to Take Before Making an S Election

Before filing Form 2553, it is prudent to take several steps.

First, review your last one to two years of financial results. Ask what your self-employment tax savings would have been if you had paid yourself a reasonable salary and taken the remaining profit as distributions through an S corporation, after factoring in the relevant costs.

Second, prepare a realistic projection of your expected profit for the next year or two. Consistency and reasonable growth in profit support the case for an S election. Highly uncertain or declining profit may suggest caution.

Third, outline a compensation plan that includes a well supported reasonable salary figure and a plan for distributions. This is the foundation for both tax savings and audit defense. At the same time, review your ownership structure and any current or anticipated investors to confirm that they meet S corporation eligibility requirements.

Fourth, understand how your state and any other relevant jurisdictions treat S corporations and your specific type of entity. State rules can change the economics of the decision.

Finally, if you have rentals, other businesses, existing K-1s, or significant suspended or carryforward losses, have those elements reviewed to see how an S election would interact with your ability to use those items. If you have multiple owners, consider whether you are comfortable with pro rata allocations and distributions, or whether you need the additional flexibility that a partnership structure can provide.

11. How We Work With Clients on S Corporation Decisions

At High Impact CPA, we approach S corporation decisions as part of a broader tax planning and business strategy conversation, rather than as a one size fits all solution. We begin with your actual financial results, your goals for the business, and your tolerance for administrative complexity and risk.

From there, we model the potential self-employment tax savings under a range of reasonable salary scenarios, and we compare those savings to the expected increase in payroll, tax preparation, and other compliance costs. We also review state level implications and how an S election would interact with your other income, losses, existing entities, and ownership structure.

In some cases, this process leads to a clear recommendation to elect S corporation status and build systems around that choice. In others, the best conclusion is to defer the election until profits reach a higher, more stable level, or to maintain a different structure that better fits your broader tax and business picture, including flexibility in ownership and distributions.

12. Considering an S Corporation? Focus on the Whole Picture

An S corporation can be a powerful planning tool when used thoughtfully and in the right circumstances. It can also add cost, rigidity, and complexity without sufficient payoff if the decision is made solely on the promise of tax savings, without a thorough analysis of eligibility, allocations, and long term plans.

The key question is not simply, “Should I be an S corporation?” A better question is, “Given my current and expected profit, my state rules, my ownership structure, my overall tax picture, and my willingness to handle additional compliance, does S corporation taxation leave me better off after all costs and tradeoffs are considered?”

If you are evaluating an S election and would like a structured, numbers based assessment of whether it is right for you, this is exactly the kind of analysis we perform for clients. A clear, personalized evaluation can help you move forward with confidence, whether the right answer is to elect S corporation status or to maintain your current approach.

Check out our youtube channel for more tax and accounting advice: https://youtube.com/highimpactcpa

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We also have a free handy checklist that you can use to substantiate your meal expenses.

Here’s the link: https://mailchi.mp/highimpactcpa/meal-substantiation-form

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Learn about the different types of tax pros and how to differentiate them. Find the one that is right for your situation.

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Transcript:

You out there grinding? Are you a hard worker? Well, guess what? There’s a new tax deduction for you. It is the deduction for overtime pay that came with the One Big Beautiful Bill this year.

Hi, everyone. I’m Dave Lewis. I’m a certified public accountant and owner of High Impact CPA, and we are continuing our One Big Beautiful Bill series today talking about the new deduction for overtime pay. So we’ll talk about what it is, what it isn’t, how you as a taxpayer can take advantage of it, and also what it means for you business owners. So let’s jump right in—deduction for overtime pay.

So July 4th of this year the One Big Beautiful Bill got signed into law, and with it comes a whole bunch of provisions.

Now the overtime pay deduction is very similar to the no tax on tips deduction. So we’ve got a video on that, check that out. That’s the last one that we did if you’d like to learn a little bit more about that.

In the meantime, the deduction for overtime pay applies for 2025 through 2028. This is a temporary deduction.

If you are an FLSA qualified employee—basically a non-exempt worker—and working at one and a half times pay (your overtime pay), you get a tax deduction of up to $12,500 per year. And if you’re married filing jointly, that amount doubles to $25,000.

To qualify for this, you have to be an employee listed under FLSA rules as a non-exempt worker. We’ll go into that toward the end of the video because there are some tricky things that people are going to try to do that won’t work under this bill.

So, $12,500 a year if single or head of household, $25,000 if married filing jointly. Married filing separately has its own rules as usual—we won’t go over that here. I’ll probably make a whole other video on married filing separately rules for a bunch of these different deductions.

This deduction does have an income phase out, much like the tips deduction. If you are single or head of household and you’re making more than $150,000 a year, this deduction is going to start to go away for you.

For every $1,000 you have in Modified Adjusted Gross Income, you lose $100 of this deduction. So if you’re making a lot of money, this deduction may go away.

Once you hit $275,000 of income, it’s completely gone. And if you’re married filing jointly, that amount is $425,000. Everything in between that $150,000 to $275,000 (or $300,000 to $425,000 if married filing jointly) is a phased-down deduction.

So just be aware of that. If you’re an hourly worker with a high rate of pay and you or your spouse also have other income sources, you may phase out of this deduction.

As far as employers go, nothing really changes this year. It’s like any other wage you’re going to pay—it still has to be reported on the W-2 for your employees.

For 2025, we were hoping for a new W-2 form that would help define all the different wage categories (regular pay, cash tips, overtime, etc.). But we’re not getting a new W-2 form for 2025.

So for now, everything is lumped in box one of the W-2, which means we’ll have to go back to payroll records. Taxpayers will need to keep their final pay stubs and make sure to delineate between regular pay and overtime pay in order to take advantage of this deduction.

There is a new W-2 form slated to come out in 2026 that will break all of that information out. But for 2025, since the bill was passed mid-year, we just have to deal with it and move forward.

Pretty simple deduction—not a lot of meat to it—but there are going to be some things people try to do to skirt it.

The biggest one I’ve heard is: “I’m an S Corp owner. I have to pay myself a reasonable salary. I’ll just put myself on an hourly wage, and then after 40 hours a week, I’ll pay myself overtime.”

Well, no. Like the no tax on tips deduction, you’re not going to be able to get away with that. FLSA specifically excludes S corporation shareholders.

There are limited instances, like if you have a spouse working in the business or if you hire your kids. But it’s always substance-over-form with the IRS.

If you do get audited, they’ll look at what the spouse or kids are actually doing. Does it make sense for the business? Is there really a lack of control over compensation? If not, it won’t fly.

So just be careful—lawmakers and the IRS do think about these things when drafting bills.

One thing I should have said at the top: overtime pay is still subject to Social Security and Medicare taxes. This deduction is only on the income tax side for taxpayers, not something employers need to worry about.

Anyway, this one’s been a bit of a rambler. Again, not a huge amount of detail to it—it’s not super complicated—but just be aware it’s out there.

If you’re an hourly worker making overtime, be aware this deduction is available to you and understand the phaseouts and whether or not they apply.

If you need some help with your taxes, if you need a good tax professional, please reach out to us at High Impact CPA. I’ll leave our contact information in the description below.

As always, if you like the content, like and subscribe.

I’m not a great videographer—we’re getting better at it though. In a couple of months, we’ll have a brand new studio, and the video quality is going to be a lot better.

So stick around. I’m not a YouTuber, but we’re going to make it work. Thanks everyone. Take care.

Want to pay less in taxes? Book a discovery call with us today

https://calendly.com/highimpactcpa/discovery

The post OBBB Series: Deduction for Overtime Pay appeared first on High Impact CPA.

Transcript:

No tax on tips? Yes please, I will take that. So, gotta make sure now that I just change all of my wages into tips, right?

No problem. Well, not quite. We are going to dig into the One Big Beautiful Bill once again and we are going to talk about the no tax on tips provision.

Hi everyone, I’m David Lewis. I’m a certified public accountant and owner of High Impact CPA. This is our next foray into the One Big Beautiful Bill series where we go through the legislation that was passed this year and see what it actually means for you as a taxpayer, whether you’re a business or an individual, and how you can take advantage of the provisions and do a little tax planning so that you can pay less in taxes.

So, we’re going to jump right into it. So, the no tax on tips was a big selling point for this legislation.

It made a lot of headlines. It was very newsworthy because it affects a lot of people in lower to middle income brackets and it’s just very popular all around.

But obviously when you have such a broad statement as no taxes on tips, there’s going to be some truth to it and there’s going to be a conflation and misconstruing of what it actually means and what you can actually do with it.

You’re going to see a lot of social media gurus online say what I did at the top of the video, like, well, just go ahead and change all of your income into tip income, and you don’t have to pay taxes on it, right?

Oh man, if only, if only. Well, unfortunately for people scheming at that, yes, Congress and the people that wrote this bill do think about those things.

It actually does cross their mind, believe it or not, when it comes to putting in the final provisions of the bill.

So let’s look at what no taxes on tips actually means and what it could mean for you. So looking at the former law before we got the One Big Beautiful Bill, tips are like any other form of income.

They are included in your federal gross income to derive your taxable income. So that’s how it’s always been.

Like everything else, whether you’re a small business owner that takes tips or you’re an individual that takes tips, it all adds up and aggregates to come up with your taxable income that is then assessed.

So with the new provisions of the Big Beautiful Bill, there is a deduction now for up to $25,000 on qualified tips. And the most important thing I want to point out with this bill is that it relates to income tax only.

There are a couple different taxes that you’re assessed on your tax return. You have your income tax, which is the one that pretty much everyone is familiar with. However, there are also employment taxes that you pay.

Those are your Social Security and your Medicare that you pay into. Now, this $25,000 deduction does not apply to Social Security and Medicare.

You are still going to pay those taxes on those tips.

So very important. One, if you’re an employer, you still need to track the income on behalf of your employees because, as you know, you have to collect those taxes, you have to remit those taxes, you have to remit the employee’s portion, and you have to remit the employer’s portion to the IRS. So that is going to be unaffected by this provision.

You still need to track everything. And if you are a W-2 employee and you’re receiving tips, it needs to be reported on your W-2 and now it’s going to be broken out like it has in the past where you’re going to have the tips. Then on your own tax return that’s where you’re going to take the deduction, right?

So really, administratively, nothing changes from a W-2 perspective. You’re still going to get the same thing. You are going to have Medicare and Social Security taken out. You’re going to have federal income tax withheld. And then, at the end of the year, that’s where you’re actually going to figure out this deduction.

Also, with this deduction, there is an income phase-out. That means once you start making too much, this deduction goes away for you. And so this helps, obviously, balance the budget, which this bill certainly didn’t, but this is their way of saying, hey, we’re putting a cap on this deduction.

So, in this case, if your Modified Adjusted Gross Income (MAGI) exceeds $150,000 if you’re single or head of household, or $300,000 married filing jointly, for every extra $1,000 that you make, that deduction is reduced by $100.

Example: someone who’s filing status is single. They’ve got gross income for the year of $160,000. So this tip deduction gets reduced down to $24,000. That’s the extra $10,000 you made, $100 per $1,000 tranche.

Now you’re left with a $24,000 deduction—assuming you have $24,000 in tips to actually deduct.

Now here’s the fun part, and if anything, the most important provision in all of it. This is where people try to get smart.

First off, a tip has a very specific definition. The payor controls it. You have no ability to go after them in court if they don’t pay it.

So it is completely voluntary to the payor. And you have no way to say what they do or don’t give.

So one, you’re already skirting the definition of a tip. But two, Congress said they’re not just going to make up new positions or new types of jobs so that people can take advantage of this tax provision.

So if your occupation does not traditionally and customarily receive tips on or before December 31st of 2024, you don’t get to take the deduction.

If you were in a business or a position that regularly takes tips as of the end of last year, you’re good. It applies to you for that tip income. Think restaurant workers, massage therapists, dog groomers—anything that customarily receives tips counts.

Unfortunately, we don’t have the entire list just yet. Treasury’s working on it. We’re slated to get it in October. We’ll see if that happens.

Also, if you’re self-employed, this counts for you. You get the deduction for tips.

However, there’s an extra wrinkle. The tip income you receive cannot be used to also figure your Qualified Business Income for the Section 199A deduction. That would be double dipping.

Finally, this deduction as it stands now is not permanent. We get it for 2025, 2026, 2027, and 2028. After that, it goes away.

Anyway, if you have any questions regarding the income that you’re receiving, whether or not it qualifies for this particular deduction on tips, feel free to reach out to us at High Impact CPA.

We do free discovery calls all the time—there will be a link down in the description of this video.

As always, I appreciate you being here, appreciate you listening to some very dry topics, but hopefully it made a bit of a difference. Like and subscribe if you want more.

There’s going to be more videos coming out in the future. We’re trying to get them out a little bit faster, even with the extended deadlines and everything.

So look for more content coming soon. Thanks again, everyone. Have a great day.

The post OBBB Series: No Taxes on Tips? appeared first on High Impact CPA.