Tips and Overtime deductions for 2025
The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025 introduces new above-the-line deductions for employees related to qualified tips and qualified overtime compensation for tax years 2025 through 2028. While these deductions are claimed by employees, employers play a critical role in enabling them by accurately calculating and documenting the qualifying amounts.
Key Points for Employers:
No Changes to 2025 Form W-2: The IRS has confirmed that the 2025 W-2 will not include designated fields for reporting qualified tips or overtime. Revised forms are expected in 2026.
Alternative Reporting Methods Required: To support employee deductions for 2025, employers should:
Track and calculate qualified tips and qualified overtime compensation separately.
Provide this information to employees via Box 14 of the W-2 or through a separate written statement.
Include the employee’s tipped occupation, if applicable, using the Treasury’s occupation codes once finalized.
Safe Harbor Guidance Pending: The AICPA has requested the IRS to issue safe harbor rules allowing employers to use alternative documentation such as pay stubs, tip logs, and hours worked records to substantiate these amounts.
Good Faith Efforts Encouraged: The IRS has indicated that employers making a good faith effort to comply with these reporting requirements will not be penalized for 2025.
Action Steps:
Review payroll systems to ensure you can identify and track qualified tips and overtime separately.
Document employee occupations for tipped roles using the IRS’s forthcoming occupation codes.
Prepare to issue supplemental statements to employees if Box 14 is not sufficient.
Consult with us if you need help determining what qualifies as “qualified” under the new law.
Links to important details:
Tax Changes to Overtime Pay Under the 2025 Big Beautiful Bill Tax Act (OBBBA) - CPA Practice Advisor
We recommend starting preparations now to ensure a smooth transition. If you have questions or need help evaluating your options, please contact our office. We’re here to support you every step of the way.