The One Big Beautiful Bill (OBBBA), enacted in July 2025, introduced two new tax deductions for individuals, effective for tax years 2025 through 2028:
Qualified Tips
- Annual Deduction Cap: $25,000 (Married taxpayers must file a joint return)
- Modified Adjusted Gross Income (MAGI) Phase-Out: $150,000 ($300,000 filing jointly)
- Qualified tips refer to voluntary cash or charged tips received by individuals in occupations that customarily and regularly receive tips. Mandatory service charges or automatic gratuities do not qualify for this deduction.
- A preliminary list of qualifying occupations is available on the Department of the Treasury’s website: Tipped-Occupations.
- For tax years 2026 – 2028, qualified tip amounts will be reported on the W-2 in Box 12 with code TP. The Tipped Occupation Code (TTOC) to identify the employee’s specific service role will be reported in Box 14b.
Qualified Overtime
- Annual Deduction Cap: $12,500 ($25,000 filing jointly)
- Modified Adjusted Gross Income (MAGI) Phase-Out: $150,000 ($300,000 filing jointly)
- Qualified overtime is the premium portion (0.5) of overtime compensation paid in accordance with the Fair Labor Standards Act (FLSA) for working more than 40 hours in a workweek. This amount does not include overtime earned due to special/ contractual agreements, overtime paid to many agricultural workers, or overtime earned due to state-specific laws. For example, California overtime based on working over 8 hours in a day, double-time over 12 hours in a day, or any hours worked on the seventh consecutive day is not considered “qualified overtime” under the new law.
- For tax years 2026 – 2028, qualified overtime premium amounts will be reported on the W-2 in Box 12 with code TT.
Since the OBBBA was passed in July 2025, the IRS recognized that payroll systems and Form W-2s could not be updated in time to meet the reporting requirements, so they provided a tiered implementation approach to roll out these changes.
For Tax Year 2025
The IRS delayed reporting requirements for employers until the 2026 tax year and provided transition and penalty relief for 2025 (Treasury, IRS provide penalty relief for tax year 2025 for information reporting on tips and overtime under the One, Big, Beautiful Bill | Internal Revenue Service).
- The IRS also allowed reasonable methods for estimating tip and overtime deductions (Treasury, IRS provides guidance for individuals who received tips or overtime during tax year 2025 | Internal Revenue Service)
- For Qualified Tips, employees in qualified tipped occupations could use tips reported in box 7 of the W-2 to report the deduction
- For Qualified Overtime, the IRS allowed employees to use IRS formulas to help calculate their qualified overtime deduction.
- For the 2025 tax year, employers will not face penalties (Relief from Certain Penalties Related to Information Reporting Required in Connection with No Tax on Tips and Overtime: Notice 2025-62) for failing to separately report the new required information in 2025.
Important Update for Tax Year 2026
For tax year 2026, employers will be required to report information on Qualified Overtime and Qualified Tips on Form W-2. Qualified Overtime will be reported on the W-2 in Box 12 using code TT, and the Qualified Tips will be reported in Box 12 using code TP. In addition, the Treasury Tipped Occupation Code (TTOC) for the employee will need to be reported in Box 14b for tipped employees.
Next Steps
Innovative is in the process of streamlining these complex reporting requirements for clients within our Payroll & Time Keeping platform. If you are looking for a solution, please contact our Business Development team at 707-586-4300 or https://www.ibspayroll.com
Resources
Wages and the Fair Labor Standards Act | U.S. Department of Labor
One, Big, Beautiful Bill provisions – Individuals and workers | Internal Revenue Service
Disclaimer: These materials are provided for informational purposes only and are not intended as legal or tax advice. Clients should contact their legal or tax professionals to discuss how these matters relate to their individual circumstances