Key features of the One, Big, Beautiful Bill (OBBB) enacted in 2025 — the so-called “no-tax on tips” and “no tax on overtime” provisions — merit important clarification: These provisions did not remove taxes from these payments; rather, they allow qualified workers to take a tax deduction for tips and certain overtime payments, up to certain limits.

The OBBB makes no changes to employer requirements with respect to withholding Federal taxes from tips or overtime. Rather, the worker is responsible for determining if they are eligible for the credit and then for claiming it on their tax return.

Although there is no change to employer tax withholding, for 2026, employers will be required to report on an employee’s Form W-2 certain cash tips received during the year and the occupation of the tip recipient. They also will be required to report on Form W-2 the total amount of qualified overtime compensation paid during the year.

The IRS has announced that Forms W-2 and 1099 for tax year 2025 will not be updated to account for the OBBB-related changes because it was a transition year, and employers are not required to report tips or qualified overtime for 2025. Therefore employers will be given penalty relief from their reporting obligations. However, the IRS encourages employers to provide employees, particularly those in a tipped occupation, with their occupation codes and separate accountings of cash tips, so the employees can claim the deduction for qualified tips for tax year 2025.

Likewise, employers are encouraged to provide employees with separate accountings of overtime compensation, so their employees have the information necessary to claim the overtime deduction for 2025. Employers can provide the information through an online portal, written statements provided to the employees, or in the case of qualified overtime compensation by using Box 14 of the employee’s Form W-2.

Employers should note that the deduction for qualified overtime only applies to overtime premiums paid as required by Federal law, not any payments required only under state law (such as, for example, daily overtime in California) or overtime paid when crediting employees for non-working periods (e.g., applying 8 hours of “working time” for a non-working holiday and paying overtime when an employee actually works 40 or less hours).

Employers with nonexempt employees in states that require overtime payments above and beyond Federal requirements, and employers that credit nonexempt employees for non-worked time for overtime purposes, should take action now to be able to properly report “qualified overtime” at the end of 2026.

For more details, contact your D+G employment lawyer and see:
Relief from Certain Penalties Related to Information Reporting Required in Connection with No Tax on Tips and Overtime