The One Big Beautiful Bill (OBBB), which was signed into law on July 4, 2025, generally exempts tips and overtime pay (the “half” portion of the “time and one half”) from federal income taxes. See our prior e-alert for additional details.
As a reminder, effective from 2025 through 2028, the OBBB allows employees who receive qualified tips or qualified overtime compensation to deduct these amounts from their income. Although the OBBB requires employers to report the total amount of qualified tips and qualified overtime compensation paid on the employee’s Form W-2, the Internal Revenue Service (IRS) recently announced in Notice 2025-62 that employers will not be required to separately account for qualified tips and qualified overtime compensation on W-2 forms for 2025.
For 2025, the IRS “encourages” employers to provide employees with a separate accounting of qualified overtime compensation so that employees have the information necessary to claim a deduction for the 2025 taxable year. The IRS states that employers can make this information available to employees by including it in box 14 of the employee’s Form W-2, through an online portal, through written statements provided to employees or through other secure methods. If an employer does not advise employees of their qualified overtime amounts using one of these methods, the IRS states in Notice 2025-69 that employees may use a “reasonable method” to determine the correct amount of qualified overtime compensation and sets forth several options for how employees can make this determination.
Note that while the IRS has not made any changes to the 2025 Form W-2, the IRS has released a draft 2026 Form W-2 and codes to be used for reporting in 2026.
If you have questions about tips and overtime pay, please contact our Labor & Employment team.
Mark F. Williams
Of Counsel
[email protected]
203.575.2618
Nick Zaino
Partner
[email protected]
203.5784270
This information is for educational purposes only, to provide general information and a general understanding of the law. It does not constitute legal advice and does not establish any attorney-client relationship.