The One Big Beautiful Bill introduces new deductions for certain workers, but with them come additional reporting requirements for employers.
As many U.S. taxpayers know, the One Big Beautiful Bill (OBBB or the Act) signed into law on July 4, 2025, created two new temporary deductions for certain employees receiving “qualified tips” and “qualified overtime compensation.” (see our previous article for more details). However, the information necessary to allow employees to calculate these deductions will require employers to report additional information on Form W-2 and Form 1099 beginning for the 2025 tax year (forms prepared in January 2026).
Two sections of the Act, 70201 and 70202, impose reporting requirements on businesses making payments to employees, or to non-employees as the case may be, of qualified tips or qualified overtime. The language in these sections of the OBBB amends the Internal Revenue Code in a number of places related to business payments to payees. In both instances, however, individuals are only allowed deductions for those items that are received during the taxable year and that are included on statements furnished to the individual by the payer. If the item is not reported by the payer, no deduction will be available to the recipient of the qualifying compensation.
Concerning the tip deduction, qualified tips are defined to include only those (i) “received by an individual in an occupation which customarily and regularly received tips on or before December 31, 2024, as provided by the Secretary.” Tips must be voluntarily paid by the payor to an individual not working for a business defined as a specified service trade or business (accountants, attorneys, consultants, medical professionals, etc.). Further, the IRS is authorized to establish other requirements. Essentially, the rules are in place to benefit employees who typically receive tips and prevent recharacterization of income for those in the past who were not tipped (such as your author).
Concerning the payment of “qualified overtime compensation,” this term is defined to mean “compensation paid to an individual required under section 7 of the Fair Labor Standards Act of 1938 (FLSA) that is in excess of the regular rate (as used in such section) at which such individual is employed.” Overtime not meeting this definitional requirement is not qualified overtime compensation defined under the new provisions. Businesses should consider consulting with their employment/labor legal advisors to conclude whether overtime that the business pays meets this requirement under the FSLA.
Additionally, for the 2025 tax year, both Act provisions provide transitional rules allowing employers to approximate amounts of both tips and overtime compensation by a separate accounting using any reasonable method as specified by the IRS. Future guidance from the IRS is necessary.
Currently, only the statutory language as provided in the OBBB is currently available, leaving employers craving additional guidance to be able to comply. On July 14, the IRS issued a fact sheet noting the following for payers of qualified tips and qualified overtime:
- No Tax on Tips: The IRS must publish a list of occupations that “customarily and regularly” receive tips on or before December 31, 2024. The IRS will also provide transition relief for employers and payors subject to the new reporting requirements.
- No Tax on Overtime: The IRS indicates that employers and other payers will be required to file information returns with the IRS (or Social Security Administration) and furnish statements to taxpayers showing the total amount of qualified overtime compensation paid during the year and that transition relief will be provided for employers and other payers subject to the new reporting requirements.
Businesses may need to update their accounting, payroll, and accounts payable systems to be able to appropriately track and identify payments that meet the definitions of “qualified tips” and “qualified overtime compensation.” These changes often take time to implement, so businesses should be considering their options now.
If you have questions about how the OBBB may affect you or your organization, please reach out to us at [email protected].
This article is part of our ongoing series on the potential impact of the One Big Beautiful Bill. You may view our full library on our OBBB Resource Center.
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