OBBBA – What Employers Need to Know re: Overtime Premium and Tipped Wages

OBBBA – What Employers Need to Know re: Overtime Premium and Tipped Wages

In July, the OBBBA was signed into law. This bill included 2 items that are particularly impactful to employers:

1) The exclusion of Overtime Premium Wages (the “half” portion of “time and a half”) from Taxable Income (for determining Federal Income Tax liability) for certain individuals; and
2) The exclusion of Tip Wages from Taxable Income (for determining Federal Income Tax Liability) for certain individuals.

The Overtime Premium Wage exclusion and the Tipped Wage exclusion are available, regardless of whether or not a taxpayer itemizes their deductions.

In order to claim the deduction for Overtime Premium Wages and Tipped Wages from their Adjusted Gross Income, employees will need to provide supporting documents, when they file their personal income tax returns with IRS. Qualified Overtime and Qualified Tipped Wages must be reported on IRS Form W2 or another IRS approved statement.

While the OBBBA states that the display of this information must be on IRS Form W2, the IRS has issued guidance indicating that there will be no modifications to the format of the 2025 W2. However, the format of the 2026 Form W2 will include this information.

We are still awaiting guidance from IRS on what format will be expected for non-W2 employee statements.

Other Key Facts:

• Employees will be able to deduct up to $12,500 from their Taxable Income in “qualified overtime compensation.” This reduction in Taxable Income is available to all taxpayers with Adjusted Gross Income of $150,000 or less, and phases out by $100 for every $1,000 over the threshold.
• The definition of Qualified Overtime Compensation includes only the extra pay that an employer was obligated to pay in total compensation, due to the Overtime pay rules of the Fair Labor Standards Act. In essence, this means that “Qualified Overtime Compensation” only includes the 0.5x portion of the 1.5x regular rate of pay.
• The “No Tax on Tips” provision allows employees and self-employed individuals to deduct up to $25,000 of qualified tips they received in a year, per return. The deduction phases out for taxpayers with incomes above $150,000 (or $300,000 in the case of a joint return).

The IRS will offer transition relief for the 2025 tax year for both employees claiming the deduction and employers complying with the new reporting requirements. This transition relief applies to the employer’s reporting requirements and the exact methodology that is used for determining the total amount of Qualified Overtime Premium wages and Qualified Tipped Wages.

Although we are still awaiting final guidance from IRS on the expected format of the reporting for 2025 Qualified Overtime Premium Wages and 2025 Qualified Tipped Wages, employers should focus now on making sure that they (or their payroll provider) will be able to provide this info in whatever format is required.