The One Big Beautiful Bill Act (OBBBA), which President Trump signed into law in July 2025, purports to eliminate taxes on overtime and tips from 2025 to 2028. Accordingly, the OBBBA requires employers to track overtime and tipped wages, and to report separate accountings of each to employees. Employers must also provide tipped employees with an occupation code from the IRS's list of tipped occupations to ensure that the employees are eligible to deduct tipped wages.
Current W-2s and Form 1099s do not provide space for reporting overtime and tip compensation, but the IRS has issued guidance to clarify its expectations for employers who may be confused by the new requirements. Here are three take aways:
Employers will not incur penalties for failing to report tips and overtime compensation for 2025
The IRS's recent notice assures employers that the agency is aware employers may not have the reporting information required, or the systems in place to obtain it. The IRS also acknowledged that currently available tax forms do not contain space for the information and that therefore 2025 is a grace period. The IRS will not punish employers for failing to comply with the OBBBA's reporting requirements but says non-compliance in 2026 and beyond could result in penalties of approximately $60 to $680 for each incomplete W-2.
Employers are still encouraged to provide workers with occupation codes and separate accountings for overtime and tips in 2025
Although the OBBA's overtime and tip reporting requirements are not in effect until 2026, the IRS still encourages employers, to the extent possible, to provide employees with the information. Employers could provide it through an online portal, written statements, or other secure methods. Early compliance will help employees to file accurate returns and prepare employers for next year, when the grace period ends.
Employees with questions about deductions and how to file their individual tax return should consult IRS guidance
The OBBBA promised "no tax on tips" and "no tax on overtime," but the reality is more complicated, especially for 2025, when employers and employees may not have access to itemized accountings. The IRS's recent guidance outlines how workers can calculate tax breaks for tips and overtime, and it contains several helpful examples, including the deduction calculation for a bartender with both reported and unreported tips.
If your organization requires assistance with OBBBA compliance or wage reporting, please contact the authors of this article or any attorney in Venable's Labor and Employment Group.