The H.R.1 – One Big Beautiful Bill Act (OBBB Act) signed into law on July 4, 2025, adds two new tax deductions for workers and introduces new reporting for employers.

  • No tax on tips: a deduction for “qualified tips” in occupations that customarily and regularly received tips on or before December 31, 2024.
  • No tax on overtime: a deduction for the “extra half” portion of FLSA time-and-a-half (the premium above the regular rate) that is reported on a W-2 or certain 1099s.

 

Taxpayer Eligibility for Tips and Overtime (IRS FS-2025-03)

  • Deduction is available for both itemizing and non-itemizing taxpayers.
  • The taxpayer must include their Social Security Number on the return.
  • The deduction phases out for individuals with modified adjusted gross income over $150,000, or $300,000 for joint filers.
  • Taxpayers must file jointly if married to claim the deduction.

 

Qualified Tips Determination

 

Non-Qualified Tips

  • Occupations not listed by Treasury, IRS as tipped occupations.
  • Employees whose employer is a Specified Service Trade or Business (SSTB) under section 199A are not eligible.
  • Mandatory service charges or auto‑gratuities are not tips.

 

Qualified Overtime Determination

As of now, the IRS has not issued detailed instructions on how to determine “qualified overtime” (the overtime premium amount above the regular rate) for the new “No Tax on Overtime” deduction. Tax Year 2025 is a transition year with penalty relief on the new reporting.

 

Taxpayer Limits

  • Overtime maximum annual deduction is $12,500 individual and $25,000 for joint filers.
  • Tips maximum annual deduction is $25,000.

 

Tax Year 2025 Reporting

The IRS provides transition relief for tax year 2025 (IRS Notice 2025-62).  The IRS will not impose certain penalties if employers/payors do not report separate total of qualified overtime or separate cash tip totals and occupation code on information returns and payee statements.

However, the IRS strongly encourages employers to give employees separate accountings of qualified tips and qualified overtime using 2025 Form W-2 box 14, an online portal, or a secure supplemental statement—so employees can claim deductions accurately.

PeopleSoft Payroll for North America plans to provide employers the ability to report qualified tips and qualified overtime for tax year 2025 on Form W-2 box 14.

  • Box 14 codes:
    • 14OP – OBBBTP – Qualified Tips
    • 14OT – OBBBTT – Qualified Overtime

 

Tax Year 2026 Reporting

Looking ahead to tax year 2026, the IRS published draft 2026 Form W-2 to add the following for reporting OBBB tips and overtime:

  • Box 14b (new box)
    • Treasury tipped occupation code (TTOC)
  • Box 12 (new codes):
    • TP – Qualified Tips
    • TS – Non-qualified Tips
    • TT – Qualified Overtime

 

Employers should keep the new box 12 codes in mind and review their earning code set up defined in the system to capture the qualified tips, non-qualified tips, and qualified overtime prior to their first payroll for January 2026.

PeopleSoft plans delivery of a new page to map Treasury Tip Occupation Code (TTOC) to Standard Occupational Classification (SOC).   Employers should ensure to add SOC on the Define Job Code page under the USA section.  For tax year 2026 year-end, PeopleSoft will use the SOC from employee Job Code to determine the correct TTOC to report on 2026 Form W-2.

 

Key Takeaways for Employers

The One Big Beautiful Bill Act introduces significant changes for both employees and employers regarding the taxation and reporting of tips and overtime. As these rules roll out in 2025 and 2026, it is essential for employers to review their payroll systems and reporting processes to ensure compliance. Employees should also review their eligibility and consult the latest IRS guidance. For specific questions or to ensure full compliance, always refer to your organization’s legal and tax professionals. Staying informed and proactive will help minimize errors and take full advantage of the new deductions available under this legislation.

 

Note: This content is for informational purposes. Always consult your organization’s legal and tax professionals regarding compliance obligations.