The passage of the One Big Beautiful Bill Act (OBBBA) brought significant changes to federal overtime and tip reporting, effective 2025-2028. Below is a summary of what you need to know, along with recommended next steps.
Overtime
Employee Deduction: Employees may now deduct up to $12,500 ($25,000 for joint filers) of “qualified overtime compensation” from their federal taxable income. This applies to the “half” portion of time-and-a-half pay for hours worked over 40 in a week. The deduction phases out starting at $150,000 single/$300,000 joint
W-2 Reporting: For 2025, employers must begin tracking FLSA-mandated overtime separately. The IRS allows a “reasonable method” for reporting this on W-2s for 2025, as most payroll systems do not yet track this overtime separately. Reporting is voluntary for 2025, and there will be no penalties for reasonable omissions if a good faith effort is made. Reporting becomes mandatory in 2026, with new W-2 codes for qualified overtime.
Tips
Separate Reporting: Employers must now separately report designated cash tips and the recipient’s occupation on Forms W-2, 1099, and 1099-K. This is in addition to the existing requirement to report total employee tips on wage statements.
W-2 Changes: For 2025, continue using current W-2 forms. Transition relief is available for employers making good faith efforts to comply. Starting in 2026, new reporting boxes will be added.
Expanded FICA Tip Credit: The FICA tip credit is now available to more industries, including beauty service businesses.
Reference Table
As of October 2025, there is no new IRS or Department of Labor requirement for what must be shown on employee pay stubs regarding qualified overtime compensation or qualified tips under the OBBBA. Employers should continue to use their existing pay stub practices for reporting overtime and tips, as required by state law or company policy.
Employers are encouraged to begin tracking these amounts internally in their payroll systems to prepare for the new W-2 requirements and updated IRS forms that will take effect for the 2026 tax year. The IRS will provide final instructions before the 2026 filing season, further clarifying changes and updates.
| Tax Year | Reporting Item | W-2 Box | Code/Description | Mandatory/Voluntary | Notes |
| 2025 | Qualified Overtime | Box 14 (Other) | None | Voluntary | Use any reasonable method; no new code required |
| 2025 | Qualified Tips | Box 7 | Social security tips | Mandatory | Also include in Box 1 and Box 5 |
| 2025 | Occupation (Tips) | Box 14 (Other) | None | Voluntary | No specific code; transition relief applies |
| 2026 | Qualified Overtime | Box 12 | TT (Qualified Overtime Compensation) | Mandatory | New code “TT” required |
| 2026 | Qualified Tips | Box 12 | TP (Qualified Tips) | Mandatory | New code “TP” required |
| 2026 | Occupation (Tips) | Box 14b | Treasury-issued occupation code | Mandatory (for tips) | IRS will provide list of qualifying tipped occupations |
Employee Communication: Best Practices
As of October 2025, there is no federal requirement for a written notice to employees about these changes. However, proactive communication is strongly recommended to manage expectations and reduce confusion, especially since payroll withholding will not change for 2025.
Consider providing employees with FAQs or written materials explaining:
- The new deductions for overtime and tips
- That withholding will not change for 2025
- How to claim the deductions on their 2025 tax returns
If you have questions about or need assistance with implementing these changes or communicating with your employees, please contact our office.