How the One Big Beautiful Bill Act impacts payroll, tips, and overtime

On July 4, 2025, the One Big Beautiful Bill Act (OBBBA), also known as the Working Families Tax Cuts, was signed into law. For employers, the legislation brings big changes to how tips and overtime are treated for federal income tax purposes, along with new accounts for children and a wave of IRS guidance to help workers and businesses navigate the transition.

Tax law changes are complicated. Here, find a breakdown of everything you need to know, from what qualifies under the new no-tax-on-tips and no-tax-on-overtime provisions to how employers support their employees when they file their 2026 returns. Also: what's coming in later years to help plan ahead.

What the One Big Beautiful Bill Act (OBBBA) changes for employers

While the OBBBA delivers new tax deductions for workers, it also adds new reporting and payroll visibility requirements that businesses should start preparing for now.

Overview of the Working Families Tax Cuts

The Working Families Tax Cuts in the OBBBA introduce several updates for 2025 through 2028. It creates new deductions for qualified tips (i.e., no tax on tips) and qualified overtime (i.e., no tax on overtime), boosts the Child Tax Credit, and adds an extra deduction for many seniors. These deductions are available to a wide range of workers, whether they itemize or not. However, they do begin to phase out at higher income levels.

For employers, this brings a few practical takeaways. You’ll want to stay on top of new Treasury and IRS guidance, prepare for updated reporting requirements, and make sure your payroll setup helps employees clearly see the tip and overtime pay amounts they’ll use later when filing their personal returns.

What changed and what did not change

It helps to draw a clear line between what's new and what stays the same.

What changed:

• Employees may now deduct up to $25,000 in qualified tips on their personal tax returns.
• Employees may now deduct up to $12,500 in qualified overtime pay on their personal tax returns.
• New Trump Accounts (tax-advantaged savings for children) are now available, with employer contribution options.
• Treasury Tipped Occupation Codes (TTOCs) will be required for W-2 reporting starting in tax year 2026 and must be included on 2026 Forms W‑2 for eligible tipped employees.
• Starting in tax year 2026, employers must fill in new W‑2/1099 boxes for tips and overtime, but employees still calculate and claim their own deductions on their individual returns.

What did not change:

• Tips and overtime wages are still subject to Federal Insurance Contributions Act (FICA) taxes.
• Payroll withholding on tips and overtime continues as normal.

No tax on tips: what employers need to know

Here’s what employers should know about which tips qualify, what stays taxable, and what to do now to stay compliant and ready for the next phase.

What qualifies as deductible tips

Under the OBBBA, employees can take a tax deduction up to $25,000 in qualified tips from their federal taxable income. Qualified tips are voluntary cash or charged tips received from customers, including amounts received through tip sharing.

Tips that fall outside this definition, such as mandatory service charges or gratuities added automatically to bills, don’t qualify. These are treated as regular wages, not tips.

What remains taxable (FICA and payroll withholding)

This deduction applies only to federal income tax. Tips still count as wages for payroll purposes, so all tips, qualified or not, remain subject to FICA taxes (Social Security and Medicare). And withholding works the same way it does today.

In other words, nothing changes about how tips are taxed on paychecks under this law. Employees see the benefit later, when they claim the deduction on their personal tax return.

Treasury tipped occupation codes (TTOCs)

The Treasury Department has issued regulations and a list of Tipped Occupation Codes (TTOCs) that will be assigned to eligible employees. These codes are required for W-2 reporting starting in tax year 2026.

For 2026, employers should review the final codes, decide which roles in their business qualify as tipped occupations, and update payroll so each eligible employee has the correct TTOC reflected on their Form W‑2.

Employer action steps for tax year 2025 and how they set you up for 2026

For 2025, there were no new required fields on payroll forms and no mandatory changes to how you processed tips. In preparation for tax year 2026, here are a few things you might consider doing now:

• Make sure tip amounts were accurately tracked in your system and showed up correctly in Box 7 on 2025 Forms W‑2.
• Get familiar with which tips may be “non‑qualified” under the new rules, especially since the IRS offered limited penalty relief for 2025 if detailed tracking wasn’t yet in place.

What to prepare for in tax year 2026

Starting in 2026, employers will need to:

• Assign Treasury Tipped Occupation Codes (TTOCs) to eligible tipped employees.
• Report tip and overtime data on updated W-2 and 1099 forms.
• Track non-qualified tips separately using new payroll items.

QuickBooks has already created support articles to help customers set up tips and overtime tracking for tax year 2026. The new items are available for both Desktop and Online Payroll customers.

Visit the No Tax on Tips support article.

No tax on overtime: payroll implications

Overtime rules can already vary by state and policy, and this deduction adds another layer, so it’s worth getting clear on FLSA overtime, premium pay, and upcoming reporting requirements.

What qualifies under FLSA overtime rules

The deduction for qualified overtime applies only to overtime hours worked under the Fair Labor Standards Act (FLSA). In most cases, that means hours worked beyond 40 in a given workweek. Employees can claim up to $12,500 in qualified overtime compensation per return (or $25,000 on a joint return).

If your company pays overtime under a state law or company policy that’s more generous than FLSA requirements, only the portion calculated under FLSA rules qualifies for the federal deduction.

How the deductible portion is calculated

The law is designed to cover the overtime premium, not the base wage portion. Here's how that works, depending on how you pay overtime:

• Standard time-and-a-half (1.5x): The qualified overtime deduction generally equals one‑third of the total overtime pay when you only know the 1.5x amount. For example, if an employee earns $300 in overtime pay, $100 is the qualified deductible amount.
• Double time scenarios (2.0x): When overtime is paid at double the regular rate, you should recalculate what overtime would have been at 1.5x and use only the FLSA‑required half‑time premium as the qualified amount, rather than applying a fixed fraction of the total double‑time pay.

Federal vs. state overtime differences

Overtime rules can look different depending on where you do business, and that matters here. Even if your state law or company policy is more generous, the federal deduction applies only to the overtime that’s required under FLSA.

That’s especially important in states like California, where daily overtime can begin after 8 hours in a day, even if the employee hasn’t worked more than 40 hours in the week. In those cases, only the portion of overtime that would have been owed under FLSA is eligible for the federal deduction. Any additional overtime you pay because of state rules or your own policy generally won’t qualify.

To keep employees confident at tax time, clearly explain how your overtime policy compares to FLSA, so they can pinpoint which overtime amounts may be deductible.

Employer action steps for tax year 2026

For 2026, your payroll process will need clearer overtime tracking because employees will use the pay and hour details you provide, along with new W‑2 information, to estimate any deductions they can claim when they file.

Here’s what you can do now:

• Share a clear year-end record: Provide each employee with their final 2026 pay stub showing year-to-date overtime hours and overtime pay, so they have a reliable reference at tax time.
• Explain how overtime is calculated at your business: Let employees know whether you pay overtime at 1.5x, 2.0x, or a mix, and how that aligns with FLSA minimum requirements.
• Clarify what “qualified” overtime is really based on: In plain terms, help employees understand that the qualified amount is generally tied to the extra pay on top of their regular rate (the overtime premium portion). They can take that info to their tax pro to calculate what applies on their return.
• Reinforce accurate reporting: Encourage employees to review their hours and pay details and keep good records. Small checks now can help prevent issues later.

What to prepare for in tax year 2026

Starting in tax year 2026, employers and other payers will need to report qualified overtime separately on updated IRS forms, including Form W-2 and certain 1099s. To do that, you’ll need payroll data that clearly identifies the FLSA overtime premium portion for each worker.

Here’s what to plan for:

• Set up separate overtime tracking in payroll: Configure your payroll software to track qualified (FLSA-required) overtime separately from any additional overtime you pay under state law or company policy.
• Stay current on new form instructions: Review the finalized 2026 W-2 and 1099 guidance as it’s released, so you know what to report and where to report it.
• Use reports to support accurate year-end reporting: Make sure your payroll reports can produce clear year-end summaries of qualified overtime, so you can meet IRS reporting requirements and help employees claim their deduction with confidence.

Visit the No Tax on Overtime support article for detailed steps on setting up the new items for tax year 2026.

IRS guidance and reporting for tax year 2026

For tax year 2026, IRS reporting will change in a few ways, according to guidance released in January 2026.

What the IRS confirmed about W-2, 1099, and 941 forms

While forms W-2, 1099, and 941 did not change for tax year 2025, there will be changes in 2026. Employers will see new boxes for tips and overtime deductions on their 2026 Forms W-2, 1099-NEC, and 1099-MISC. Tax year 2025 was treated as a transition year for information-reporting enforcement.

How employees calculate their deductions

For tax year 2025, employees claim these deductions on their personal federal tax return (Form 1040) using the new Schedule 1-A, following IRS instructions. Starting in tax year 2026, the relevant information for tips and overtime will be reported to employees in new boxes on their Form W-2 or 1099.

• For tips: Employees generally use tip income shown on their Form W-2 or 1099, plus any tips reported on Form 4137 and other required statements. It’s based on reported tip amounts, not a Social Security wage-base threshold.
• For overtime: Employees can use their final pay stub or payroll summaries to pull their overtime hours and pay, then apply the calculation methods outlined in the Schedule 1-A instructions. For example, if overtime is paid at time-and-a-half (1.5x) and only a single overtime total is available, the deductible premium portion is generally one-third of the total overtime pay. For double time (2.0x), employees should follow the IRS method to isolate the FLSA-required premium portion.

New tax-advantaged accounts for children born 2025–2028

The OBBBA also creates a brand-new type of individual retirement account for children, officially called Trump Accounts. These accounts are available for children born between January 1, 2025, and December 31, 2028.

Contribution limits and employer contribution rules

After an initial $1,000 federal government contribution, the accounts can receive up to $5,000 in annual contributions from parents, guardians, or other individuals. Employers may contribute up to $2,500 of that annual maximum on behalf of an employee or their dependent. The employer's contribution is excluded from the employee's taxable income.

Funds must be invested in certain mutual funds or exchange-traded funds that track a U.S. stock index, such as the S&P 500.

Payroll considerations

Employer contributions of up to $2,500 per year are excluded from the employee's income, which means they don't need to be reported as wages. However, payroll systems will need to be configured to handle these contributions properly once they become active.

Expected support timeline

Trump Accounts cannot be funded before July 4, 2026. QuickBooks Payroll is actively exploring options to support these accounts starting around that date, when contributions first become eligible. Stay tuned for updates as that timeline approaches.

Key employer takeaways for tax year 2026

A lot will be changing for tax year 2026, but your payroll responsibilities are relatively straightforward. Here's what matters most:

• No payroll tax changes: Tips and overtime are still subject to FICA. Your payroll processes don't need to change.
• New forms for 2026: Starting in 2026, Forms W-2 and 1099 will have new boxes for tips and overtime.
• Employees claim deductions on personal returns: The benefit flows through individual tax filings, not through payroll adjustments. Your job is to give employees the information they need to file correctly.
• Employers need to update reporting practices: Starting in 2026, employers will need to follow more detailed reporting requirements.

Staying prepared for ongoing payroll updates

We've already built 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 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

Tax compliance is a moving target, especially with legislation this significant. Bookmark this page and check back as new guidance is released. We'll keep it updated so you always have the latest.

Frequently asked questions (OBBBA/Working Families Tax Cuts)

What counts as a “qualified tip” under the Working Families Tax Cuts (OBBBA)?

A qualified tip is a voluntary cash or card tip (or tip-share distribution) earned in an occupation the Treasury designates as a tipped role using a Treasury Tipped Occupation Code (TTOC). Tips must be reported as income to qualify. The deduction is capped at $25,000 per tax return and applies to federal income tax only.

Which overtime hours qualify for the federal deduction under OBBBA?

Only FLSA-required overtime qualifies, typically over 40 hours in a workweek for non-exempt employees. The deductible amount is the overtime premium (the extra pay above the regular rate), not the full overtime wage. Overtime paid beyond FLSA due to state law or company policy generally doesn’t qualify. The deduction is capped at $12,500 per tax return and applies to federal income tax only.

Do employees need to adjust their W-4 to claim tips or overtime deductions under OBBBA?

No. Employees claim the tips and overtime deductions when they file their federal return. Updating a W-4 is optional for employees who want to adjust withholding.

Who is eligible for the new children’s retirement accounts created by the Working Families Tax Cuts (OBBBA)?

Children born Jan 1, 2025–Dec 31, 2028, may be eligible. The account includes a $1,000 federal deposit and allows up to $5,000 per year in contributions. Employers may contribute up to $2,500 (excluded from the employee’s gross income). Employer contributions begin July 2026.

How can QuickBooks Payroll help track tips, overtime, and children’s retirement accounts under OBBBA?

QuickBooks Payroll supports tip and overtime tracking with payroll reports, and QuickBooks Workforce gives employees 24/7 access to pay stubs and W-2s. For 2026, QuickBooks is adding support for TTOCs, updated W-2/1099 reporting, new tracking items for non-qualified tips/overtime, and children’s retirement account contributions. Check the QuickBooks Payroll support hub for updates.

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