The IRS has released critical guidance clarifying how new deductions for qualified cash tips and overtime compensation will be calculated for the 2025 tax year under the One Big Beautiful Bill Act (OBBBA). While the deductions are claimed by workers, the guidance has meaningful implications for employers’ payroll processes, employee communications, and compliance planning.
For the 2025 tax year, employers are not required to separately report total cash tips, occupation codes, or eligible overtime premiums on Forms W-2, although employers can voluntarily provide related information in Box 14, or through a supplemental statement. As a result, many employees will need to estimate or reconstruct deductible amounts using existing payroll records, tip reports, or other documentation. This transition-year gap is likely to lead to increased employee questions, requests for clarification, and potential disputes over what information employers can or should provide.
Employers should be aware of several practical challenges that may arise in 2025:
Requests for payroll detail – Employees may ask employers to break out overtime premiums (the “half” portion of time-and-a-half) or to confirm total tips reported during the year, even though this information is not required to be separately stated until 2026.
FLSA eligibility questions – Because the overtime deduction applies only to overtime required under federal law, employees may ask whether they are considered FLSA-eligible, particularly where state overtime rules differ.
Consistency and reliance issues – If employers voluntarily provide supplemental information (for example, in Box 14 of the W-2 or separate statements), employees may rely on that data for tax reporting, increasing the importance of accuracy and consistency.
Scope and limitations – Employers may need to explain that the deductions do not eliminate payroll taxes, do not change withholding requirements, and do not apply to all overtime arrangements (such as double-time or collectively bargained overtime).
Looking ahead, the guidance also underscores the importance of preparing for expanded reporting in 2026, when employers will be required to include total cash tips, occupation codes, and eligible overtime information on Forms W-2 and certain information returns. Businesses in industries with tipped or overtime-heavy workforces should begin evaluating whether their payroll, timekeeping, and point-of-sale systems can capture this information reliably.
Please reach out to your Sisterson representative or info@sisterson.com if you’d like assistance assessing your exposure or addressing next steps.