Under the OBBBA (One Big Beautiful Bill Act) of 2025, employees can now get a deduction for some of their tips and overtime for the years 2025 to 2028. While this is an employee tax break (not an employer tax break), employers have reporting responsibilities for 2025 to give the relevant information to their employees.
Earlier this year, the IRS announced that 2025 forms W-2 will not be modified at this late date. But in 2026, the forms W-2 will have new input fields to help employees comply with these provisions. The fact that the 2025 form W-2 is not being updated for OBBBA does not change the fact that employers should still provide this 2025 compensation information to those they pay.
Employer who prepare their own payroll reports and W-2s need to pay particular attention to these details. Commercial payroll service providers should be prepared to handle this for you (please verify with your representative); however, if you prepare your own payroll, please note the new rules and requirements for 2025. Employers are advised to begin reviewing their payroll records now for qualified overtime and tips paid this year, starting from January.
Changes under OBBBA. The Act requires that employers provide certain information to employees, retroactive to 1/1/2025 –
- The amount of “qualified overtime” paid in 2025
- The amount of “qualified tips” paid in 2025.
- The occupation of the employee receiving qualified tips.
Penalties apply when an employer does not provide the required information under OBBBA.
Key definitions from these OBBBA provisions –
- Qualified overtime refers to pay in excess of the standard hourly rate for work exceeding 40 hours in one week. No other definition applies.
- Example. Jane works 44 hours a week. Her standard rate is $10 an hour, but she makes time-and-a-half for overtime. Therefore, her pay for the week is 40 hours times $10 per hour, plus 4 hours times $15 per hour, for a gross total of $460. The amount of qualified overtime is the premium rate over her base pay ($5 an hour) times the number of hours over 40 in the week (4). Her qualified overtime is $20.
- Qualified tips are cash tips received by an individual in an occupation that customarily and regularly receives tips. This includes employees on form W-2 and non-employees on forms 1099.
- Qualified tips are cash payments voluntarily paid by customers, including payments by cash, check, credit card, or other equivalent means, that are in excess of the amount agreed to, required, or expected to be paid. It includes tips received through tip-sharing arrangements. It can include non-cash payments if they can readily be converted to a fixed amount of cash, such as tokens or casino chips. Tips do not include trips, food, event tickets, cryptocurrency, or other forms that cannot be readily converted to a fixed amount of cash.
- Service charges and mandatory gratuities are generally excluded from the definition of qualified tips, unless the customer can disregard or modify them without incurring any consequences.
- Tips received in specified service trade or businesses are not qualified tips. Section 199A(d)(2).
- Tips to owners or employees from their own business do not qualify.
- Tips received in illegal activity do not qualify.
- Additional guidance is expected before year-end.
A qualified tip occupation is one listed here. The TTOC (Treasury Tipped Occupation Code), provided in that link for each occupation, should be reported to the employee.
It is important to reiterate that employers must continue to report tips and overtime as taxable compensation as they have done before. Whether the employee is eligible for any exclusion of this compensation from taxable income is a determination made at the preparation of the employee’s 1040 for 2025. The employer does not have sufficient information to determine if the overtime or tips qualify for the new deduction and should not advise the employee on this determination.
Notice 2025-62. On November 5, 2025, the IRS issued this notice, which outlines employer responsibilities for OBBBA compensation reporting for 2025 and provides for relief from penalties if certain minimum requirements are met. This relief is for 2025 ONLY. It adds that additional guidance is forthcoming for the employees. The notice provides that –
- Employers are “encouraged”, but not required, to make a good faith effort to comply with the information provided to employees for 2025, as detailed above.
- Penalties will not apply if all of the technical requirements for employers are not met for 2025.
R. Milton Howell III, CPA, CSEP
Milton is experienced in taxation issues including, tax research for both open and closed transactions, structuring complex tax transactions, estate and income tax planning, and representing clients before tax authorities. As DMJPS' former Director of Tax Services, Milton regularly writes and reviews articles in local, regional, and national publications on tax matters and spends significant time monitoring current tax issues and legislation.
More posts