By Sara Jacobi, CPA, CEPA, Director of Taxation at Blue & Co.
The One Big Beautiful Bill (“OBBB”), introduced two “no tax on” provisions that impact both employers and employees in a wide range of industries starting in 2025.
“No Tax On Overtime”
Taxpayers can deduct up to $12,500 ($25,000 married filing jointly) of “qualified overtime compensation.” These deductions begin to phase out when modified adjusted gross income exceeds $150,000 ($300,000 for joint filers).
“No Tax On Tips”
Taxpayers in qualifying tipped occupations can deduct up to $25,000 of “qualified tips” per year. This deduction also phases out when modified adjusted gross income exceeds $150,000 ($300,000 married filing jointly).
Both provisions are in effect for the 2025 – 2028 tax years.
Employer Reporting
As you may expect, it falls on employers to report information related to qualified overtime and qualified tips to their employees. The employee deductions are available only for amounts reported as “qualified tips” and “qualified overtime” on their compensation information returns. Compensation information is generally reported annually to employees by employers on Form W-2.
2025 Reporting
The IRS recently announced there will be no changes to the 2025 W-2 (which will be sent to employees in January 2026 and reports 2025 compensation and withholding information).
The IRS also instructed employers to “continue using current procedures for reporting and withholding.” While this guidance meets the IRS’s stated goal to provide additional time for businesses to implement the OBBB changes effectively, it is at odds with the OBBB’s prescription for employees to deduct the qualified amount included on their W-2. Therefore, at this time, we recommend employers report required information related to overtime compensation and tips in Box 14 or via a separate statement provided to employees. Box 14 of the W-2 is reserved for miscellaneous information not reported elsewhere on Form W-2.
2026 Reporting
The IRS also recently shared a draft of the 2026 Form W-2.
The draft 2026 Form W-2 introduces changes that capture the impacts of OBBB. Specifically, the new form splits box 14 up into Box 14a, which is labeled “other” and Box 14b, which is labeled “Treasury Tipped Occupation Code” and is where employers will report the relevant code for the tipped occupation of the employee.
To report qualified overtime and tips, two new codes have been introduced for Box 12. Code TT will be used to report qualified overtime, and Code TP will be used to report qualified tips.
Employee withholding should account for both deductions starting in 2026, and the IRS is expected to provide updated withholding procedures for tax years beginning January 1, 2026.
Next Steps
If you are an employer utilizing a reputable third-party payroll service, it’s likely that they are prepared or in the process of preparing to meet the required reporting obligations. However, the time is now to confirm this is the case. If you are utilizing proprietary and/or out-of-date payroll software to process payroll and generate year-end filings, now is the time to assess the system capabilities to ensure you’ll be able to meet your reporting obligations by January 2026.
Questions on Overtime Rules and Labor Laws? Register for Our Upcoming Webinar!
Date: Monday, September 22, 2025
Time: 11:00 AM EST
CPE Eligible
The One Big Beautiful Bill brings sweeping changes to employer reporting and compensation practices — and understanding the details is critical to avoiding costly mistakes.
In this upcoming webinar, Blue & Co. will be joined by Amy Adolay, Partner and employment law attorney at Krieg DeVault, to discuss:
- Employer-related provisions of the bill
- Employee classification issues (with real-life examples)
- Practical steps to help you stay compliant
Attendees will walk away with clarity on what’s changed, what pitfalls to avoid, and how to prepare their organizations for tax season.
Click here to register now!
