The One Big Beautiful Bill Act (OBBBA) lets eligible employees lower the income they pay federal income tax on by subtracting some of their tips and overtime pay when they file their yearly tax return.
This is called a deduction. It doesn't make tips or overtime completely tax-free.
The deductions apply for tax years 2025 through 2028, and employees claim them directly when they file their personal tax returns.
Note: Tips and overtime still have Social Security and Medicare taxes taken out as usual. Only federal income tax is affected.
Who qualifies
To claim the tips or overtime deduction, an employee must:
Have a valid Social Security number.
File jointly with their spouse, if married.
The deduction gets smaller gradually once an employee’s modified adjusted gross income (MAGI) is above $150,000, or $300,000 for married couples filing together. MAGI is a number from the employee’s tax return, not their salary.
Tips
Employees can deduct up to $25,000 in qualified tips. The limit is the same for married couples filing together.
Only tips that customers give by choice count, whether cash or card, including tips shared through a tip pool.
The employee's job must be on the IRS list of tipped jobs.
Automatic service charges added to a bill don't count.
Overtime
Employees can deduct up to $12,500 in qualified overtime pay, or $25,000 for married couples filing together.
Only overtime the Fair Labor Standards Act (FLSA) requires counts. This generally means hours over 40 in a workweek. Overtime that only state law requires, such as daily overtime in some states, doesn’t count. Neither does extra overtime pay an employer chooses to give.
Paychecks and Form W-4
Employees can fill out the new Form W-4, the form that tells you how much tax to take from each paycheck, to include their expected tips and overtime deduction. If they do, less tax comes out of each paycheck.
Employees don’t have to submit a new W-4. If an employee gives you an updated one, you must use it.
Changes to Form W-2 starting with 2026
For 2025, the IRS gave employers a one-year pass (Notice 2025-62), so Form W-2 didn't change. Starting with 2026, Form W-2 has new spots to show:
Total cash tips employees reported to you, including card tips and tips shared through a tip pool (code TP)
The tipped job code for the employee’s job (new Box 14b). It can hold up to two codes if an employee worked more than one tipped job. Tips from a job that isn’t on the IRS list are coded 000.
Qualifying overtime pay (code TT)
Employer contributions to a new children's savings account called a Trump account (code TA)
Tipped job codes (TTOC)
The IRS gave each of more than 70 tipped jobs a 3-digit code, officially the Treasury Tipped Occupation Code (TTOC). For example, bartenders are 101. Jobs that aren't tipped use 000. This code goes on Form W-2.
What this means for Workstream Payroll users
An update planned for the first week of December will add job codes to your jobs:
Each job on the Jobs page will ask Is this a tipped job? and have two code fields: the tipped job code (TTOC), and a standard government job category code, the Standard Occupational Classification (SOC).
Whatever you set on a job applies to everyone in that job, now and in the future.
Workstream will suggest codes based on the job title, and a banner lets you apply codes to many jobs at once.
A red Set up job codes banner will stay on screen until the codes are added, and it can't be closed.
Fix codes on the job, not on each employee's profile (the Team member setup screen). That screen belongs to our payroll partner, and changes made there don't carry back to the job.
If a tipped job doesn’t have a code set up, it’s reported as 000, and employees in that job can’t use their tips deduction. Make sure every tipped job has a code before the end of the year.
Employees will see their job code when they preview their W-2.
What you can do now: make a list of your jobs and note which ones get tips. If you already know the codes, even better.
Overtime: Qualifying overtime (code TT) is calculated and reported automatically. You don’t need to set anything up. Just keep running payroll as usual.
Learn more
Frequently Asked Questions (FAQs)
Do employees need to fill out a new Form W-4?
Do employees need to fill out a new Form W-4?
No. Employees can choose to submit an updated W-4 to account for the deduction. If they do, you must use it.
Are tips and overtime still taxed?
Are tips and overtime still taxed?
Yes. Social Security and Medicare taxes still apply. Only federal income tax is affected, and employees claim the deduction when they file their tax return.
What does job code 000 mean?
What does job code 000 mean?
It means the job isn’t on the IRS list of tipped jobs, or its code hasn’t been set up yet. Tips reported under 000 don’t qualify for the deduction.
Do I need to set anything up for overtime?
Do I need to set anything up for overtime?
No. Qualifying overtime is calculated and reported on Form W-2 automatically.
Does all overtime count?
Does all overtime count?
No. Only the extra half of overtime pay that the Fair Labor Standards Act (FLSA) requires counts.
When does OBBBA apply?
When does OBBBA apply?
The tips and overtime deductions apply to tax years 2025 through 2028.