The One Big Beautiful Bill Act (OBBBA) introduces federal income tax deductions for qualified tips (up to $25,000) and qualified overtime premiums (up to $12,500) beginning in the 2025 tax year.
While these amounts may reduce an employee's personal tax liability, they are not automatically exempt from federal income tax withholding at the time of payment. Employers must continue to track and report these earnings while withholding Social Security, Medicare, and applicable state taxes as required by current IRS guidance.
Qualified tips must be:
Note: Mandatory service charges (for example, an automatic 15–20% service fee) are not tips and do not qualify.
Qualified overtime (OT) is:
Employers must continue to withhold federal income tax on qualified tips and qualified overtime.
The “no federal tax on tips / overtime” benefit is:
Employers should not stop federal income tax withholding based on qualification status.
Yes. ezPaycheck 2026 adds two new payment types:
These payment types help employers track and report amounts correctly on paychecks, reports, and Form W-2.
Employers must:
To properly classify and report qualified tips and overtime, employers should:
ezPaycheck 2026 will automatically withhold payroll taxes for qualified tips and overtime, and fill in 2026 Form W-2 (which is available in November or December 2026) with the qualified tips and overtime.
Yes.
Employers do not enforce caps or income limits during payroll processing.
No.
Employers should continue labeling all qualified tips and overtime, even if:
Caps and income limits are handled by the employee on their personal tax return, not by payroll.
Employers should inform employees that:
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