IRS Update on OBBBA Deductions for Tips and Overtime
Published on by Chaleise Fleming in Tax Services
The IRS has released important updates regarding how the One Big Beautiful Bill Act (OBBBA) deductions for tips and overtime will be applied over the next several years. While these deductions were designed to minimize tax burdens and maximize cash flow, employers and employees should note that reporting changes won’t take effect until 2026. Here’s what steps you should take to prepare in advance.
A quick refresher: what is the OBBBA?
As we outlined in our earlier article, the OBBBA introduced two major above-the-line deductions: one for qualified tips and one for qualified overtime compensation. These provisions are temporary and available for tax years 2025 through 2028.
IRS decision on 2025 reporting
For the 2025 tax year, the IRS confirmed that there will be no changes to Form W-2. Employers should continue reporting tips and overtime as they’ve done in the past, with no new codes or fields required for OBBBA deductions. Transition relief will also be in place, so employers won’t face penalties in 2025 for not meeting new reporting requirements, if they comply with existing laws. In effect, 2025 is a transition year that focuses more on accurate tracking than on additional paperwork.
IRS guidance to watch for
The IRS has also announced two updates that employers and employees should watch closely. By October 2, 2025 the agency will release a list of qualifying occupations for the tip deduction, and only tips earned in these occupations will be eligible. In addition, the IRS plans to issue guidance on reasonable methods for estimating qualified tips and overtime compensation, which will be essential for compliance and planning.
Looking ahead: 2026 and beyond
Starting in tax year 2026, employers will see new reporting requirements on Form W-2:
- Box 12 will be used for OBBBA-related entries.
- Code TT will represent qualified overtime.
- Code TP will represent qualified tips.
The draft version of the 2026 Form W-2 already includes these changes, giving employers time to prepare systems and processes.
What employers should do this year
Even though the 2025 reporting process remains unchanged, employers should use this year to get organized. This includes carefully tracking all tips and overtime payments, reviewing payroll systems to prepare for updated reporting in 2026, and monitoring IRS announcements for guidance on substantiation and filing procedures. Employees will also need to understand how to substantiate deductions on their 2025 returns, with more details expected from the IRS soon.
The bottom line
The OBBBA deductions for tips and overtime have the potential to create meaningful tax savings, but the rules and reporting requirements will take careful planning to navigate. Staying proactive now will help ensure a smoother transition once the new reporting takes effect in 2026.
Have questions about how the OBBBA could impact your organization’s payroll and tax strategy? Contact us today for a free consultation with one of our experienced tax advisors. You can also learn more about what the OBBBA means for individuals and businesses here. As always, we’re here to help.
