When the One, Big, Beautiful Bill Act (OBBBA) was signed into law on July 4, employers were handed a considerable task. You and your leadership team must sort through the law’s many provisions and determine just how they affect your organization.

As you may be discovering, doing so isn’t easy. For example, the OBBBA grants eligible workers substantial tax breaks on qualified tips and overtime pay. However, these provisions aren’t only about them — your information reporting obligations may be affected as well.

Qualified tips

For tax years 2025 through 2028, the OBBBA creates a deduction of up to $25,000 for tip income in eligible occupations. These are occupations that customarily and regularly received tips before 2025. (The eligible occupations will be determined by the Treasury Secretary.)

Income-based phaseouts apply to the tax break, and federal payroll taxes, as well as state taxes if applicable, still apply to tip income. Tipped workers don’t need to itemize deductions on their tax returns to claim this deduction.

Employers play a key role in whether workers can claim the new tips deduction. Generally, workers can avail themselves of this tax break only for qualified tips (as defined under the OBBBA) that are included on an appropriate payee statement provided by employers or service providers.

For your employees, you must report qualified tips to the individual as well as the Social Security Administration on IRS Form W-2, “Wage and Tax Statement.” More specifically, you need to report:

• The total amount of cash tips reported by the employee, and
• The employee’s occupation as described under applicable sections of the tax code.

If your organization engages independent contractors or other “nonemployee payees,” you generally must submit to the IRS and the payee in question a separate accounting of the amounts reasonably designated as qualified tips. You also need to report the individual’s occupation as described under the tax code.

Such information reporting may involve IRS Form 1099-NEC, “Nonemployee Compensation,” for independent contractors, or Form 1099-K, “Payment Card and Third Party Network Transactions,” for reportable payment transactions by third-party settlement organizations to participating payees. (Whether you must complete a form depends on various factors, such as how much you paid the contractor.)

Under a transition rule, for cash tips required to be reported for periods before January 1, 2026, a separate accounting of amounts designated as cash tips can be approximated by any reasonable method specified by the Treasury Secretary.

Eligible overtime

Also for tax years 2025 through 2028, the OBBBA creates a deduction of up to $12,500 for single filers or $25,000 for joint filers for qualified overtime pay as defined by the Fair Labor Standards Act (FLSA). Income-based phaseouts and federal payroll taxes, as well as state taxes if applicable, apply. Again, workers don’t have to itemize to claim this deduction.

For employees, you must report each applicable individual’s total amount of qualified overtime pay to the person in question as well as the Social Security Administration on IRS Form W-2. Under a new twist brought forth by the OBBBA, employers need to report eligible overtime pay amounts separately on Forms W-2.

The law’s information reporting requirements for qualified overtime pay also apply to independent contractors and other nonemployee payees. This may be surprising given that, under the FLSA, independent contractors aren’t entitled to overtime pay. Nonetheless, the OBBBA stipulates that employers must provide the IRS and each applicable payee a separate accounting of the portion of payments that have been properly designated as eligible overtime pay. This may involve IRS Form 1099-NEC.

It’s expected that the IRS and the U.S. Department of the Treasury will eventually release guidance clarifying which types of workers, including nonemployee payees, are eligible to receive qualified overtime pay and, thus, claim the related deduction. Employer information reporting may also be addressed in such guidance.

Under a transition rule, for qualified overtime pay required to be reported for periods before January 1, 2026, a separate accounting of amounts designated as qualified overtime pay can be approximated by any reasonable method specified by the Treasury Secretary.

More changes ahead

As noted, additional guidance is expected on these provisions and employers’ related obligations. Also, be aware that the Treasury Secretary is required to modify the procedures for income tax withholding to account for both the new tips deduction and overtime deduction. So, changes in these areas are likely forthcoming. However, these revisions likely won’t go into effect until 2026.

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