OBBBA – Tips & OT Taxation for Employees
The One Big Beautiful Bill Act (OBBBA)
No Tax On Overtime
No Tax on Tips
The One Big Beautiful Bill Act – OBBBA
The One Big Beautiful Bill Act (OBBBA) changes how certain types of pay – specifically tips and overtime (OT)- are treated for federal income tax purposes.
Under OBBBA, qualifying tips and qualifying overtime will no longer be subject to federal income tax. These earnings will still appear on your W-2, but you’ll be able to deduct them on your federal tax return.
AdvanStaff HR will provide the information you need to claim the deduction when you file your 2025 taxes.
2025 Tax Forms and Reporting
Tips
Your total reported tips will appear on your 2025 Form W-2.
Tips will not be broken out between:
- Direct tips received from customers (cash and credit card), and
- Service fees or service charges.
Because the federal tax credit applies only to direct tips received from customers, you may need to consult with your employer if you received service fees that were reported as general tips in 2025.
You should only claim the tax credit for direct tips (cash and credit card tips), not service fees.
Overtime Reporting
Overtime earnings will appear on your 2025 Form W-2 in box 14.
- The W-2 will not distinguish between state (overtime over 8 or over 12 hours due to state law) and federal overtime (overtime for hours worked over 40 in a workweek).
Because you can only take a deduction against federal overtime, you may need to consult your employer if you received both state and federal overtime to see what amounts are federal and eligible for tax credit. This paragraph will only be included for employers with employees in NV, CA, CO, AK, WA (healthcare, public works, etc.), OR (manufacturing, canneries, timber wood) .
If you do not seek clarification for #3 and / or #4 above, and are audited, you may have to seek help from your original 2025 records.
FAQs for Employee
What exactly is changing under OBBBA?
Your qualifying tips and qualifying overtime will not be taxed at the federal income tax level.
You’ll still receive this pay in your paycheck as usual, but the tax benefit happens when you file – you will claim a deduction for these amounts on your federal return.
Does this change how my paycheck looks?
No. Payroll withholding (Social Security, Medicare, and federal income tax) does not change during the year. The tax savings occur when you file your return.
How will this appear on my W2? (2025)
For tax year 2025, the IRS has granted penalty relief under Notice 202562 for employers who do not provide separate OBBBA reporting.
AdvanStaff will display the occupation code and an approximation of qualified tips and overtime in Box 14 of your W-2.
What types of tips qualify for the OBBBA deduction?
According to proposed IRS guidance, tips must be voluntarily given by customers (not mandatory service charges). Qualifying occupations include those that customarily and regularly receive tips – such as restaurant, hospitality, salon, transportation, and recreation positions.
Tips may be paid in cash, by card, or in an electronic form convertible to cash. The annual deduction for tips is capped at $25,000 and begins to phase out at modified adjusted gross income (AGI)above $150,000 ($300,000 for joint filers).
What types of overtime qualify?
- You can claim the OBBBA deduction for qualifying tips and overtime on your 2025 federal return.
- Keep your W2 and any accompanying notice that summarizes your eligible amounts.
- Do not rely solely on paystubs to calculate your deduction, since pay codes may not match IRS definitions.
What do I need to do for my 2025 tax filing? text
Currently, OBBBA applies only to federal income taxes. State tax agencies have not yet issued guidance. Normal state withholding will continue until further notice.
Will AdvanStaff notify me of changes?
Yes. We’ll share updates once the IRS issues final rules on qualified tips/overtime and confirms W-2 display requirements.
Key Takeaways (as of Nov. 18, 2025)
- You can deduct qualifying tips (up to $25,000; phase-out begins at $150,000 AGI / $300,000 joint) and qualifying overtime on your federal return.
- For tax year 2025, the IRS has granted penalty relief under Notice 202562 for employers who do not provide separate OBBBA reporting. AdvanStaff will display the occupation code, an approximation of qualified tips, and overtime in Box 14 of your W-2. Clients should review the occupation code, as well as an approximation of qualified tips and overtime.
- Only the FLSA overtime premium portion is expected to qualify; final IRS guidance is pending.
NOTE: This FAQ is provided for informational purposes only. It is not for the purpose of establishing an attorney-client relationship or providing legal or tax advice, and should not be relied upon as legal or tax advice. As employment and tax laws are dynamic and ever-evolving fields, you should contact an attorney to obtain advice with respect to any particular issue or problem.
