What Is OBBBA? The One Big Beautiful Bill Act Explained for Employers

The One Big Beautiful Bill Act (OBBBA), signed into law in July 2025, introduced significant changes to how employers report tip income and overtime pay on employee W-2 forms. If you have tipped employees, this law affects you.

What Changed

OBBBA created two new tax deductions for employees:

• Qualified Tip Deduction — Employees can deduct up to $25,000 of voluntary tip income from federal taxes (2025-2028)
• Qualified Overtime Premium Deduction — The 0.5x premium portion of overtime pay is deductible

New W-2 Requirements

To support these deductions, the IRS updated Form W-2 with new reporting fields:

• Box 12, Code TP — Year-to-date qualified tip income
• Box 12, Code TT — Year-to-date qualified overtime premium
• Box 14b — Treasury Tipped Occupation Code (TTOC) identifying the employee's tipped role

What Counts as a "Qualified Tip"?

Per IRS guidance based on Rev. Ruling 2012-18:

• Qualified: Cash tips, credit card tips, and any amount left voluntarily by the customer
• Not qualified: Mandatory service charges, auto-gratuity on large parties, banquet fees, or any amount the customer was required to pay

What Is the Qualified Overtime Premium?

OBBBA only allows deduction of the premium portion (0.5x) of overtime, not the full 1.5x rate. Example:

• Employee works 10 overtime hours at $15/hr
• Full OT pay = 10 × $15 × 1.5 = $225
• Qualified premium = 10 × $15 × 0.5 = $75 (this is the deductible amount)

MAGI Phase-Outs

The deductions phase out at higher income levels:

• Tips: Phase-out begins at $150K (single) / $300K (joint)
• Overtime: Phase-out begins at $150K (single) / $275K (joint)

Penalties for Non-Compliance

Missing or incorrect Box 12/14b codes on W-2s trigger IRS penalties of $60 to $680 per form depending on how late corrections are filed. A restaurant with 50 employees could face up to $34,000 in penalties.

What Employers Need to Do

1. Track qualified vs. non-qualified tips for each employee, each pay period
2. Calculate the 0.5x overtime premium separately from total OT pay
3. Assign the correct TTOC code to each tipped employee
4. Report all three values on W-2s in January

Related Guides

• Qualified Tips vs. Service Charges
• How to Calculate the OT Premium
• Complete TTOC Code List
• IRS Penalties for Incorrect W-2s