What to Tell Your Employees About OBBBA Reporting?

Employers should inform employees that qualified tips and overtime are still reported on the W-2, federal income tax may not be withheld, but final eligibility, caps, and income limits are determined when filing their personal tax return, and additional tax may be owed or refunded at year-end.

Employer Guide: Optional 2025 W-2 Reporting for Tax-Free Overtime/Tips (OBBBA)

Q: How to Optionally Enter OBBBA Data on 2025 W-2s?

Employers can optionally enter OBBBA data on 2025 W-2s by entering the amount of qualified tips and qualified overtime in Box 14. If the employee has qualified tips or overtime, the employer should enter the amount in Box 14. If the employee does not have qualified tips or overtime, the employer should leave Box 14 blank.

Overview

As you prepare 2025 W-2 forms, please be aware that the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, introduced new reporting requirements for "Qualified Overtime" and "Qualified Tips."

Because the law was enacted mid-year, the current version of ezPaycheck 2025 and ezAccounting 2025 do not have dedicated automated fields for these items. You must manually enter these values into Box 14 of the W-2.

The IRS has recognized the timing challenges for businesses to update payroll systems mid-year. As a result:

Reporting is optional for the 2025 tax year.
Penalty relief is in effect. The IRS will not impose penalties for failing to separately report these amounts on 2025 Forms W-2, provided your forms are otherwise correct and complete.
Reporting becomes mandatory in 2026.

While not required, the IRS encourages employers to provide this information to their employees (e.g., in Box 14) to help them claim their new tax deductions for 2025.

Part 1: How to Optionally Enter OBBBA Data on 2025 W-2s

When you prepare the 2025 W-2 forms, you can manually enter the amount of qualified tips and qualified overtime in Box 14 of the W-2.

For Example:

For Overtime: Enter Qual_OT followed by the dollar amount (e.g., Qual_OT $400.00).

For Tips: Enter Qual_Tips followed by the dollar amount (e.g., Qual_Tips $100.00).

Note: The total amount in Box 14 should match the total amount of qualified tips and qualified overtime.

Part 2: What to Tell Your Employees

Employees may have questions about these deductions, especially if the amounts are not listed on their W-2s. You may share the following explanation with them:

Notice to Employees regarding 2025 W-2 Forms:

"Under the One Big Beautiful Bill Act (OBBBA) of 2025, certain overtime pay and tips are now eligible for federal income tax deductions on your personal return. Due to the timing of the law's passage, your employer is not required to report these specific amounts on your 2025 W-2.

How to calculate your deduction:

The IRS has provided guidance (Notice 2025-69) allowing you to use 'reasonable methods' to calculate your deductions using existing documentation like pay statements.

For 'time-and-a-half' pay, a reasonable method is to assume the 'half' premium is the qualified portion (roughly 1/3 of your total overtime pay).

The maximum annual deductions are $12,500 for individuals ($25,000 for joint filers), subject to income limits.

Please consult IRS.gov or a tax professional when filing your 2025 return to ensure you claim the correct exemption.

Related Information

This information is provided for general educational purposes only and does not constitute tax or legal advice. We are a software developer and cannot determine whether any specific employee's tips or overtime qualify for federal deductions, or how those deductions apply to an individual tax return. Employers and employees should consult the IRS guidance and/or a qualified tax professional for their specific situation.

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