Reporting Overtime and Tips in the New Year: What Employers Need To Know
The One Big Beautiful Bill Act (OBBBA) introduced a new tax benefit that allows employees to deduct certain income from overtime and tips. While the legislation passed in July 2025, employers have been eager for clarity about how these changes impact reporting.
The IRS addressed these questions in November through Notice 2025-69, providing guidance on what employers need to do in the upcoming year.
Reporting Overtime for 2025
Originally, when the OBBBA created this new deduction, overtime was expected to be reported on the W-2. However, the IRS and payroll industry need more time to update official tax forms (including W-2, 1099-NEC, 1099-MISC and 1099-K) to show these amounts separately.
Because of this delay, there will be no changes to these tax forms for 2025. Employers are not required to break out tips or qualified overtime on these forms for 2025. You may include qualifying overtime on the W-2 if you choose, but it’s optional for this year. However, you must still provide employees with a statement showing the amount of overtime that may qualify for the deduction.
Starting in 2026, the W-2 will be updated, and separate reporting will become mandatory. For now, keep your payroll process consistent, provide the required statement and plan for the changes coming next year.
Employers should begin now to identify which overtime payments meet the federal rule. Only overtime required under federal law (the Fair Labor Standards Act) qualifies for the deduction. Once you know which payments are eligible, set up a reliable way to track them so you can report accurately for 2026.
And remember, even though these amounts may qualify for a tax deduction, overtime pay is still subject to Social Security and Medicare taxes.
Reporting Tip Income for 2025
The OBBBA also introduced a deduction for tip income, and the IRS’s Notice 2025-69 clarifies specifically which tips qualify, as well as who is eligible to deduct tips.
The notice also provides practical reporting guidance for tips. Because the IRS forms (W-2 and 1099s) are not updated for 2025, employers do not need to change how they report tips on Form W-2 or other information returns. The new reporting boxes and requirements (including separate reporting of cash tips and the employee’s occupation) will start with the 2026 tax year.
Employees should still report tips to employers as usual (e.g., using Form 4070 or similar methods). Employees will rely on pay stubs, tip logs and Form 4137 to report any unreported tips when filing their 2025 taxes. Employers should be ready to provide supporting documentation (like pay stubs, tip logs or statements) if requested. It’s important to note that tips remain subject to Social Security and Medicare taxes, so standard payroll tax rules still apply.
Accurate payroll and tip records will be essential for 2026. Employers should begin working with payroll providers and HR teams to update systems and processes so they can track and report tips in the new required format next year.
Learn More
These new rules give employees an opportunity to reduce their taxable income, but there are limits on what qualifies. When communicating with your team, let them know that certain amounts may be deductible, rather than confirming eligibility. This approach helps employees stay informed while leaving the details to their tax advisors.
To learn more about how this provision and guidance may impact your business, contact your Warren Averett advisor.