New Overtime and Tip Deductions Under the OBBBA — What Employers Need to Know

Becky Byrd

Nov 05, 2025

The One Big Beautiful Bill Act (OBBBA), effective for tax years 2025 through 2028, introduces two new above-the-line deductions for individuals:

Qualified Tips Deduction
Qualified Overtime Pay Deduction

These deductions apply only to federal income tax (not to Social Security or Medicare taxes). While designed to provide tax relief for eligible workers, the OBBBA also brings new compliance and reporting requirements for employers.

1. Qualified Tips Deduction

Applies to workers in occupations where tipping was customary before January 1, 2025. See the preliminary list of qualifying occupations: Treasury Tipped Occupations List (8/27/2025)
Only voluntary tips from customers qualify (not mandatory service charges or automatic gratuities).
Tips must be paid in cash or cash equivalents (credit/debit card, check, or gift card).
Up to $25,000 per year of qualified tips may be deducted.
Deduction phases out above $150,000 MAGI for single filers and $300,000 for joint filers (joint filing required to qualify).
Available to both employees (W-2) and self-employed individuals (1099-NEC).

2. Qualified Overtime Pay Deduction

Available to individuals who receive qualified overtime pay under the Fair Labor Standards Act (FLSA).
Applies to non-exempt, salaried employees.
Only the 50% premium portion of time-and-a-half pay is eligible.
Deduction limits: $12,500 per year for single filers, $25,000 for joint filers.
Phases out at the same income thresholds as the tips deduction.

3. Reporting Requirements

2025 Forms W-2 and 1099 remain unchanged.
Employers should begin tracking qualifying tips and overtime now using reasonable estimates for 2025.
The IRS will not impose penalties for 2025 if separate tracking is not yet in place. However, employers are encouraged to give employees a summary of their qualifying tips and overtime via an online portal, written statement, or Form W-2 Box 14 to assist with individual tax filings.
Starting in 2026, updated W-2 and 1099 forms will require separate reporting of qualified tips and overtime pay, and the recipient’s occupation.

4. What Employers Should Do Now

To stay compliant and ready for employee questions:

Start tracking all tips and overtime payments—separately identify voluntary vs. mandatory tips, and regular vs. FLSA overtime.
Update payroll and recordkeeping systems to capture qualified amounts accurately.
Educate your team so employees understand that these are individual income tax deductions—not adjustments to payroll withholding.
Plan ahead for form changes and system updates required for 2026 reporting.

These new provisions can provide meaningful tax savings for your employees—but they also increase your administrative responsibilities. Early preparation will minimize compliance issues and reduce confusion during tax season.

Questions?

Contact your payroll provider now to review your systems and ensure you are ready for the new tracking and reporting rules under the OBBBA. If you are not getting what you need from your payroll provider, have questions about your reporting requirements, or have inquiries about the impact these provisions may have on your tax return, reach out to us.

Schedule an appointment to learn how we can support you

More Resources

Guide: Next Level Accounting Services for Your Growing Business

Guide: Build a Better Business by the Numbers

Case Study: Strategic Accounting Support from Acquisition to Sale

About The Author

As an expert in QBO, tax planning, and Federal, State and Local Tax, Becky provides business owners with…

bbyrd@kirschcpa.com

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