W-2 Reporting Changes for Tips and Overtime: Complete 2025–2026 Guide for Businesses and Individuals

January 28, 2026

The One Big Beautiful Bill Act (OBBBA) introduces two popular tax relief provisions for eligible workers: “no tax on tips” and “no tax on overtime.” These benefits apply as above-the-line deductions on individual, federal income tax returns for 2025 through 2028.

Who this article is for:

1. Employees who earn tips or overtime and want to understand how the deduction works and what to look for on their W‑2.

2. Employers who need to know what (if anything) changes in payroll, reporting, and recordkeeping.

How the Deduction Works

The deduction is claimed when an individual files their federal income tax return, not through payroll during the year. As a result, paycheck withholding does not change. During the year, tips and overtime are treated the same as they always have been for payroll purposes:

1. They are included in W-2 Boxes 1, 3, and 5 as taxable wages.

2. They remain subject to federal income tax withholding, as well as Social Security and Medicare taxes.

3. Employers continue to withhold and remit taxes as if no special deduction exists.

At that time an individual files their 1040, qualifying tips and the qualifying portion of overtime are deducted to lower their adjusted gross income (AGI). A lower AGI means less income is subject to federal tax, reducing the overall tax bill.

What Stays the Same

• Pay stubs continue to list base pay, overtime, and reported tips.

• Social Security and Medicare taxes still apply to all wages.

• Payroll withholding and gross amounts remain unchanged.

• The benefit appears at tax filing time instead of on each paycheck.

  
  

Employers

For overtime, only the FLSA-qualified overtime premium is eligible for the deduction. This is the extra half-time portion paid on overtime hours (for example, the additional 0.5× in time-and-a-half pay). The employee’s regular hourly wages, including the “base” portion of overtime pay, do not qualify.

Here are some points to consider for 2025 W-2 reporting:

• The IRS has indicated it will provide penalty relief for good-faith compliance efforts in 2025.

• Employers can report qualified overtime or tips in Box 14 (using labels such as “OT,” “Qualified OT,” or “Qualified Tips”) or provide employees with a supplemental statement summarizing these amounts.

• Employers should continue to maintain payroll records, timecards, and tip logs to support reported data.

Beginning in 2026:

• Formal W-2 reporting requirements are expected to apply.

• Employers should anticipate new Box 12 codes, likely TT for qualified overtime and TP for qualified tips, along with a new Box 14b containing a three-digit occupation code for tipped positions.

• Payroll and HR systems should be updated to support the new tracking and reporting fields, including use of IRS-provided occupation lists for tipped roles.

• Periodic internal reviews and strong recordkeeping will remain important, particularly in industries where tips and overtime are common.

For Employees

2025: First Year to Claim Deductions

For 2025, employees should be aware that their W-2 may not separately break out “qualified” tips or overtime. Instead, they may need to rely on paystubs or employer-provided statements to identify the amounts that qualify for the deduction. Only the additional half of overtime pay (the FLSA overtime premium) is eligible, and only voluntary tips earned in eligible occupations count.

When filing a 2025 tax return, employees may deduct up to $12,500 of qualified overtime if filing single, or $25,000 if filing jointly. Qualifying tips may be deducted up to $25,000. These deductions begin to phase out once modified adjusted gross income (MAGI) exceeds $150,000 for single filers or $300,000 for joint filers.

Because 2025 is a transition year, employees may need to maintain their own records, including paystubs, time logs, and any documentation provided by their employer that supports qualifying amounts. If there is any uncertainty, employees can request a year-end summary from their HR or payroll department.

2026 and Later: Easier Reporting

Beginning in 2026, W-2 reporting is expected to make claiming the deduction more straightforward, since employers will be subject to penalties if they do not provide information. W-2s will include Box 12 codes identifying total qualified overtime (TT) and total qualified tips (TP), along with Box 14b, which lists the occupation code used to verify eligibility.

Practical Action Steps

Employers

1. Coordinate early with payroll providers to implement system updates.

2. Train managers and employees on new requirements and definitions.

3. Update written policies and onboarding documents regarding tip and overtime reporting.

4. Perform mid-year system tests to confirm accuracy.

5. Consult a CPA for compliance validation and documentation advice.

   
   

Employees

1. Review paystubs carefully and note how overtime and tips are recorded.

2. Attain and keep records, especially during the 2025 transition year.

3. Look for new W-2 codes beginning in 2026 tax season.

4. Ask a tax professional to help you claim the new deductions properly.

   
   

Looking Forward

The OBBBA can provide meaningful tax savings for employees who earn tips or overtime pay, while also improving transparency for employers. Preparation early in 2026 will make full compliance much smoother and help everyone make the most of these new federal deductions.