Overview of the OBBBA and New Tax Deductions

Adam Johnson | Tourism Hospitality Group Leader  | Cheryl Leydon | International Tax

The “One Big Beautiful Bill Act” (OBBBA), enacted on July 4, 2025, introduces substantial changes in the tax treatment of overtime and tip income for employees, beginning with 2025 individual income tax returns. For the first time, eligible employees will be able to claim above-the-line deductions for qualified overtime pay and tips.

These deductions, designed to provide tax relief for wage earners, are subject to annual limits — employees can deduct up to $12,500 per year of the “half” portion of their overtime “time-and-a-half” pay, as well as qualified tips for specified occupations. However, these benefits are phased out for higher earners, applying only to single filers with adjusted gross incomes (AGI) up to $150,000 and joint filers up to $300,000.

Employer Reporting Requirements and IRS Guidance

While the OBBBA technically requires employers to report the total qualified tip and overtime amounts on employees’ W-2 forms, the IRS will not update the W-2 form for the 2025 filing season. Instead, employers may use Box 14 (“Other”) or provide this information separately in a written statement.

The IRS has issued penalty relief for 2025, so employers will not be penalized if they do not separately report these figures. If employers do provide supplementary reporting, there are risks if incorrect information is inadvertently provided to employees. Inaccurate reporting could lead to legal exposure under federal information return rules. The reporting is required for 2026 regardless.

There are also considerations for not providing supplementary reporting on overtime and tip income as this could cause employees to start asking their employers several questions and could cause inconsistent reporting amongst the employees.

Why Providing Information Still Matters

Despite penalty relief, employers should recognize the value in helping employees understand and access these new tax benefits. Many employees will look to their employers for help in determining which portions of their pay qualify for the deduction.

Providing a clear summary of qualified overtime and tip income — even if done outside of the W-2 — can significantly reduce confusion and limit the volume of questions your payroll or HR team may need to handle during tax season. It also helps in generating goodwill amongst the employee group as well as ensuring consistent reporting.

It’s also important to communicate with employees about the limitations of the deduction and to caution them against overstating their claims. Employers should give some basic guidance to employees to avoid inconsistent reporting, including giving the employees a statement to achieve consistency.

Regardless, for 2026, the employer will be required to report, and it is advisable to start collecting and analyzing the data earlier rather than later.

Preparing Your Business and Supporting Employees

To manage this transition, employers should review their internal payroll processes and reporting capabilities. While you are not required to track or report these amounts in a specific way for 2025, keeping accurate records of employees’ overtime and tip earnings will be helpful for both you and your staff. Providing year-end reports or supplemental earnings summaries can be an effective way to support employees’ tax reporting.

If employees do not receive this information from you, they will need to rely on IRS Notice 2025-69, which outlines how to calculate the deduction amount. Deductions will be claimed on the forthcoming Form 1-A for the 2025 tax year, and employees must ensure their claims do not exceed the set income or dollar limits.

Looking Ahead: Best Practices and Future Guidance

This first year comes with flexibility, but it’s also a learning period for both employers and employees. The IRS is expected to release more detailed guidance and updated forms for future tax years. Payroll vendors are likely to incorporate these new rules into their systems in the coming years, simplifying compliance for everyone.

In the meantime, the best approach for employers is to be proactive. Communicate early and often, train your payroll and HR staff on the new rules, and offer as much clarity as possible to your employees about their eligible income. These steps will help ensure a smooth transition and minimize confusion as everyone adapts to the new law.

Practical Steps for Employers

1. Communicate Early and Clearly

•  Inform employees about the new tax deductions and your approach to reporting for 2025.

2. Prepare to Support Employees- Anticipate increased questions during tax season regarding qualified overtime and tip income.

• Consider running year-end reports or providing breakdowns via payroll systems or supplemental statements.

3. Documentation & Recordkeeping

• Maintain detailed records of employee pay, overtime, and tip earnings to assist employees and respond to potential IRS inquiries.

4. Watch for Updated Guidance

•  The IRS is expected to release more regulations and updated forms for future years. Payroll software providers will likely improve methodologies by the 2027 filing season.

Conclusion and Resources

The 2025 tax year provides an opportunity for businesses to support their employees and build trust while navigating a significant change in the tax code. By remaining informed, maintaining clear communication, and offering supplemental information, you can help your employees take full advantage of these new deductions.

For official details and calculation examples, refer to IRS Notices 2025-62 and 2025-69, as well as IR-2025-110. If additional guidance is needed, we can be of assistance in helping to collect and report this data accurately and timely. The following information is the guidance that has been given by the Internal Revenue Service to date.

• 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
• Relief from Certain Penalties Related to Information Reporting Required in Connection with No Tax on Tips and Overtime
• Guidance for Individual Taxpayers who received Qualified Tips or Qualified Overtime Compensation in 2025
• 2025 Form 1040
• 2025 Schedule 1-A (Form 1040)

Additionally, attached are two appendices that illustrate guidance provided on how to handle various reporting situations with respect to both overtime and tips. Please feel free to contact our team members if we can be of assistance.

Appendix 1

Examples of Tip Reporting for 2025: Notice 2025-69

The following examples are intended to assist taxpayers in determining the amount of qualified tips under section 224(d) and do not address other limitations on the deduction allowed under section 224(a), including the overall limit on deductions in section 224(b)(1), the MAGI limit in section 224(b)(2), and the social security number requirement in section 224(e). See 2025 Form 1040 instructions for more details on how to apply these limitations.
In each example, unless otherwise indicated, assume that (1) the individual’s occupation is one that customarily and regularly received tips on or before December 31, 2024, and (2) all other requirements for claiming the deduction are satisfied.

EXAMPLE 1

Employee A is a restaurant server. The amount reported in A’s Form W-2 box 7 is $18,000 of social security tips. A did not report any additional tips on Form 4137. A may use $18,000 in determining the amount of qualified tips for tax year 2025.

EXAMPLE 2

Employee B is a bartender. During tax year 2025, B reports $20,000 in tips to B’s employer on Form 4070. B’s 2025 Form W-2 reports $200,000 in box 1, an amount in excess of the social security wage base, and $15,000 in box 7. Additionally, B reports $4,000 of unreported tips on Form 4137, line 4, and includes this amount in income on B’s Form 1040.
B may use either the $15,000 in box 7 of the Form W-2, or the $20,000 of tips reported to B’s employer on Forms 4070 in determining the amount of qualified tips for tax year 2025. Regardless of the option chosen, B may also include the $4,000 of unreported tips from Form 4137, line 4, in determining the amount of qualified tips.

EXAMPLE 3

Individual D is a self-employed travel guide who operates as a sole proprietor. In 2025, Individual D receives $7,000 in tips from customers paid through a third-party settlement organization as defined in section 6050W(b)(3). For tax year 2025, Individual D receives a Form 1099-K from an online booking platform that is a third-party settlement organization as defined in section 6050W(b)(3) showing $55,000 of total payments. The Form 1099-K does not separately identify the tips.
However, Individual D keeps a log of each tour that shows the date, customer, and tip amount received. Because Individual D has daily tip logs substantiating the $7,000 tip amount, D may use the $7,000 tip amount in determining qualified tips for tax year 2025.

Appendix 2

Examples of Overtime Reporting for 2025: Notice 2025-69

These examples are meant to provide calculations for determining the qualified overtime eligible for FLSA (Fair Labor Standards Act of 1938) eligible nonexempt individuals under the “no tax on overtime” deduction. The calculations shown here are before the overall limitations related to Modified AGI and the $12,500 limitation per taxpayer per year.

EXAMPLE 1:

Overtime paid at 1.5 – Overtime Premium Separately Stated
An employee’s payroll system shows $5,000 as the “overtime premium” paid in 2025. When overtime is paid at 1.5 times the regular wage, the “overtime premium” is only the additional .5 over the regular wage – the amount required by the FLSA.
The employee may use $5,000 as the amount of qualified overtime compensation for the deduction.

EXAMPLE 2:

Overtime Paid at 1.5 – Total Overtime Amount Provided
An employee’s pay stub shows a total “overtime” amount of $15,000. This amount includes both the overtime premium and regular wages for overtime hours where overtime is paid at 1.5 times the regular wage.
The employee may use $5,000 (i.e., $15,000 divided by 3) as the qualified overtime compensation.

EXAMPLE 3:

Overtime Paid at Double Time – Overtime Premium Separately Stated
An employee who is typically paid double the overtime rate indicates $10,000 in overtime premium on payroll reporting.
The employee may use $5,000 (i.e., $10,000, overtime premium at double time, divided by 2) as the qualified overtime compensation. Note that the overtime premium is limited to the rate under the FLSA of 1.5 times the regular wage.

EXAMPLE 4:

Overtime Paid at Double Time – Total Overtime Amount Provided
An employee is paid $20,000 in overtime at double the regular rate.
The employee may use $5,000 (i.e., $20,000 divided by 4) as the qualified overtime compensation.

EXAMPLE 5:

Law Enforcement with Special FLSA Rules
A law enforcement officer is paid $15,000 in overtime on a 14-day work period basis.
The officer may use $5,000 ($15,000 divided by 3) as the qualified overtime compensation. The FLSA standards for law enforcement and fire protection have additional definitions related to a defined work period.

EXAMPLE 6:

Compensatory Time
An employee receives $4,500 in wages for compensatory time off.
The employee may use $1,500 (one-third of $4,500) as the qualified overtime compensation.