What the Working Families Tax Cut Means for You and Your Team
Big news for your business and your team! On July 4, the One Big Beautiful Bill Act (OBBBA)—also known as the Working Families Tax Cut—was signed into law. This legislation brings exciting updates to the tax landscape, including new deductions for qualified tips and overtime pay.
We know tax changes can feel complicated, but don’t worry—we’ve got your back. We’ve broken down the key details of the "No Tax on Tips" and "No Tax on Overtime" provisions so you can support your hardworking team with confidence for Tax Year 2025 and beyond.
No Tax on Tips
Under this new rule, workers can claim a tax deduction on their personal returns for up to $25,000 in qualified tips. “Qualified tips” are voluntary cash or charged tips received from customers or through tip sharing.
While this doesn't change how tips are taxed on paychecks today, here's what you need to know:
- Timeline: This deduction is effective from 2025 through 2028.
- How it works: The deduction applies only to federal income tax and is in addition to the Standard Deduction. Note that all tips remain subject to FICA tax.
- Action items: Employees may choose to fill out a new W-4 to adjust their paycheck withholdings, though it isn't required.
- Looking ahead: Eligible occupations will need to assign a Treasury Tipped Occupation Code (TTOC). You won't need this code for W-2s until 2026, but sharing it with your team now can help them get a head start on their 2025 filings. The Treasury is still finalizing the list, but a draft of the codes has been published.
- How to set up in QuickBooks: For detailed information on setting up and tracking tips in QuickBooks for Tax Year 2026, visit our support article.
No Tax on Overtime
Similar to tips, this provision allows for a tax deduction on personal returns for qualified overtime pay, capped at $12,500. Overtime will continue to be taxed on paychecks as well.
- Eligibility: The deduction applies only to overtime hours required by the FLSA (typically work over 40 hours a week).
- What is covered: It specifically covers the additional "half" of time-and-a-half pay.
- State vs. Federal: If your state or company policies differ from FLSA rules, only the overtime calculated per FLSA rules qualifies.
- Tax details: Like tips, this applies only to federal income tax. Overtime wages are still subject to FICA tax.
- Action Items: Employees may choose to fill out a new W-4 to adjust their paycheck withholdings, though it isn't required.
- How to set up in QuickBooks: For detailed information on setting up and tracking overtime in QuickBooks for Tax Year 2026, visit our support article.
IRS Guidance & Reporting for 2025
In August, the IRS announced that there are no changes to standard forms W-2, 1099, and 941/944 for 2025. Since Form W-2 won’t be updated for 2025, many workers are left wondering, “How will I know the total qualified tips and overtime I can deduct on my tax filing?”
To provide further clarity on this, the IRS recently issued Notice 2025-62 providing detailed examples for reporting qualified overtime and tips for 2025. Review this notice for helpful examples if you, or a member of your team needs further guidance. The notice clarifies that while employers aren't required to provide a separate accounting of cash tips or qualified overtime, it’s recommended that they do so.
In this notice the IRS also clarifies that employers and other payors will not face penalties for failing to provide a separate accounting of any amounts reasonably designated as cash tips or the occupation of the person receiving such tips.
How You Can Support Your Team
Since the standard forms haven't changed, we suggest providing your team with a little extra documentation to help them file accurately.
For Tips
Most employees with wages under the Social Security limit of $176,100 can use the tip amounts reported in Box 7 of their W-2. If they have additional tips on Forms 4037 or 4137, they will need to provide those records to their tax preparer.
Contractors can use earnings statements, receipts, daily tip logs, or other records to calculate qualified tips.
To support your team you can provide them with the following:
- Provide Records: Provide your employees with their W-2 and final 2025 pay stub with the year-to-date totals reflected. Provide a detailed statement of any qualified tips your contractors received in 2025, along with the Tipped Occupation Code.
- Clarify Non-Qualified Tips: Let them know if any of their tips during the year were “non-qualified,” (though the IRS is providing some relief for businesses who weren't tracking that detail during 2025).
- Leverage Technology: If your team uses QuickBooks Workforce, they already have 24/7 online access to their pay stubs and W-2s. You can also run an individual payroll report in QuickBooks after the final paycheck of the year and share it directly with them.
For Overtime
Reminder! The eligible overtime tax deduction applies to overtime hours required by the FLSA. It specifically covers the additional "half" of time-and-a-half pay.
- If you pay 1.5x (Standard): The qualified portion is one-third of the total overtime pay.
- If you pay 2.0x (Double Time): The qualified portion is one-fourth of the total overtime pay.
To support your team you can provide them with the following:
- Provide Records: Provide employees with the final 2025 pay stub or a payroll report showing year-to-date overtime. In the unlikely event that you need to report overtime on a 1099, the recipient will also need to know how that overtime was calculated so they can confirm how much of the total amount is considered qualified.
- Explain Your Policy: Remind them how your company pays overtime, especially if it differs from the federal minimum (FLSA), so they know which calculation to use.
- Leverage Technology: If your team uses QuickBooks Workforce, they already have 24/7 online access to their pay stubs and W-2s. You can also run an individual payroll report in QuickBooks after the final paycheck of the year and share it directly with them.
Looking Ahead: Innovation for 2026
We're already building solutions to make the 2026 tax year even smoother for you. Stay tuned for:
- New items to track non-qualified tips and overtime.
- The ability to select Tipped Occupation Codes for employees.
- Updated reporting features for contractors.
- Updates to Dependent Care Contribution limits for Online Payroll.
- Updates to the W-2, 1099-MISC, and 1099 NEC forms for reporting tips and overtime provisions.
We've created created support articles for handling the No Tax on Tips and Overtime provisions of the bill to support our customers for Tax Year 2026. The new items for Tips and Overtime are available for Desktop and Online Payroll customers. Review the articles below for steps on setting the new items for Tax Year 2026.
Visit the No Tax on Tips support article
Visit the No Tax on Overtime support article
Trump Retirement Accounts
The Working Families Tax Cut also introduces new individual retirement accounts for children born between January 1, 2025, and December 31, 2028.
- Contributions: After an initial federal deposit of $1,000, accounts can have up to $5,000 contributed annually. Employers may contribute up to $2,500 of that annual maximum, which is excluded from the employee's income.
- What's Next: QuickBooks Payroll is exploring options to support these accounts starting in July-2026, when they become eligible for contributions.
We're committed to keeping you compliant and confident every step of the way. Bookmark this blogpost and check back regularly for new updates and information!
