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OBBBA – Tips & OT Taxation for Employers

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The One Big Beautiful Bill Act (OBBBA)

No Tax On Overtime & Tips explained

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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 the W-2, and the employee will deduct those amounts on their federal tax return. The IRS has issued transition relief for tax year 2025 (IRS Notice 202562), meaning employers will not face penalties for not providing separate OBBBA detailed reporting for 2025 payroll.

For 2026, several adjustments are needed to establish proper record-keeping and reporting. The Advanstaff HR team will work with each employer to ensure these changes are implemented properly. Employer participation is required to properly implement the needed changes.

Several updates and adjutsment in the following areas may be required:

  • Update time and attendance solutions to specifically comply with blended overtime calculations
  • Adjust current pay codes and timesheet reporting to align with new reporting requirements
  • Adjusting general ledger changes to update accounting and financial reporting
  • and many other internal systems.

2025 Earnings and Form W-2

Because this legislation was enacted mid-year but applies retroactively to wages earned beginning January 1, 2025, there was no possible way for employers to configure payroll systems in advance to separately track all earnings types for W-2 reporting. 

AdvanStaff has already complied and included supplemental information on the 2025 Form W-2 to assist employees in filing for either tax credit (tip or overtime).

The federal government has acknowledged the practical limitations employers faced in 2025 and has indicated that it will not penalize employers for providing information to the extent reasonably available. It also appears that workers filing for tax deductions may not be penalized for inaccurate reporting, though this is not entirely clear.

Tips – 2025 Reporting

As reported, the employees’ total tips will appear on the 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, the employee may need to consult with their employer if they received service fees that were reported as general tips in 2025.

Employees should only claim the tax credit for direct tips (cash and credit card tips), not service fees.

Overtime – 2025 Reporting

Overtime earnings will appear on the employees’ 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). 

The following applies to employers with employees in NV, CA, CO, AK, WA (healthcare, public works, etc.), OR (manufacturing, canneries, timber wood…..

Becuaue the employee can only take a deduction against federal overtime, the employee may need to consult their employer if they received both state and federal overtime to calculate what amounts are federal and eligible for tax credit.

2026 Reporting

The IRS has announced that the 2026 form W2 will be updated to show direct tips and federal overtime separately.  This will allow 2026 filers to accurately file for federal tax credits.

Overtime Premium (1/2-Time) Pay Stub Chance – Effective January 2026

To facilitate accurate calculation of the overtime premium (the extra ½ time paid for overtime), AdvanStaff will update payroll reporting to display the overtime premium (½-time portion) on employee payroll check stubs, which will then calculate the extra amount earned and eventually populate the 2026 form W2.

  • This change does NOT affect total employee compensation, but it may be confusing, as the overtime premium (1/2 time) will be a separate line item.
  • Please feel free to ask your management about these changes or contact AdvanStaff through our employee services group at support@advanstaff.com.
  • The 2026 Form W-2 will be much easier to read and understand, with tips and overtime broken out in numbers that can be entered on the federal tax form when 2026 taxes are filed.

Blended Overtime Calculations

Employers who report hours using multiple pay rates for an employee must calculate “blended overtime” for compliant reporting.

****ADD MORE INFO HERE******

Try the Blended OT Calculator

Overtime – 2026 Reporting (NV,CA,CO, AK, WA only)

This paragraph only applies to employers with employees in NV, CA, CO, AK, WA (healthcare, public works, etc.), OR (manufacturing, canneries, timber and wood).

In order to facilitate the separation of state overtime (over 8 or 12 hours in a day under state law) from federal overtime (over 40 hours in a work week), you will need to ensure your timekeeping system is capable of reporting overtime types to the AdvanStaff HR timesheet.

Employers utilizing AdvanStaff HR managed time and attendance systems will have the AdvanStaff HR team support for implementing these required updates.

The IRS has indicated that future tax forms may require identification of an employee’s tipped occupation to confirm eligibility for the tip-related credit. Additional guidance is expected. AdvanStaff will provide updates as more information becomes available.

Questions and Support

You may direct questions to your employer or contact AdvanStaff Employee Services at support@advanstaff.com.

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