One Big Beautiful Bill Payroll Resources

Starting with tax year 2025 and running through 2028, eligible tipped employees can claim a new federal income tax deduction for “qualified tips” on their personal tax returns. People may hear this described as “no tax on tips,” but in reality it is an above-the-line deduction on the employee’s tax return, not a change to how tips are taxed through payroll.

Employees who fall under the designated industries and job roles will be able to use the total amount of Social Security tips reported in box 7 for claiming the tax tipped deduction.

In years 2026 – 2028, tips will have special reporting on the W-2. Employers with tipped employees will assign Treasury Tipped Occupation Code (TTOC) to those job roles for proper W-2 reporting.

Nonexempt employees who work time-and-a-half overtime (hours beyond 40 in a workweek) can claim a federal income tax deduction for their qualified overtime compensation when filing their taxes. This deduction applies to tax years 2025 through 2028.

The deduction covers only the overtime premium wages—the extra half of time-and-a-half pay—if the employee meets IRS requirements. Note that this tax deduction is only for federal income taxes.

The “no tax on overtime” rule only applies to nonexempt employees who earn FLSA-qualified overtime.

States or localities may have stricter overtime policies, but these should not be considered beyond the FLSA overtime definition for the One Big Beautiful Bill overtime reporting on employee W-2s.

For the 2025 tax season, the IRS has stated taxpayers can use a “reasonable method” that takes into account regular rate and hours over 40 when determining qualified overtime.

Employee pay records show a total dollar amount of overtime paid at time-and-a-half, and taxpayers can treat one-third of that dollar amount as your FLSA overtime premium for the deduction in certain situations.

Starting in 2026 – 2028 employers will need to indicate which overtime is FLSA overtime for proper W-2 reporting.