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OBBBA (Qualified Tips and Overtime)

Jaime L. Lee
Updated

OBBBA – “Exempt” Tips and Overtime

 

The One Big Beautiful Bill Act (OBBBA) was passed with the promise of “No tax on tips or overtime”. This is a misrepresentation of what this bill actually does. Here we will review, in short, what this bill actually does (as pertains to tips and overtime), and what is required of you as an employer.

 

 

2026 and Beyond

Qualified Overtime Compensation Reporting

Beginning in 2026, Qualified Overtime Compensation (QOTC) will be required to be reported separately on federal tax forms (like the W2).

This does NOT change tax withholding, there are NO changes to paycheck calculations, this is a federal tax return benefit ONLY!

QOTC is calculated as the premium portion ONLY of any federal overtime paid. Crucially, this excludes any state or municipal, union, or company overtime allotted over the minimum federal premium, and does not include double-time, or any other “enhanced multipliers”. Current guidelines set modified adjusted gross income caps annually at: $12,500 for single filers, and $25,000 for joint filers.

If you are used to entering OT hours as a total for a given pay period, no payroll system will be able to determine which hours qualify for the tax benefit. Qualifying Overtime MUST be recorded by workweek! The heavy lifting of this reporting falls on Time & Attendance, as the qualifying hours must be logged by workweek, in accordance with federal overtime rules. We suggest working closely with your Time & Attendance provider to set up QOTC reporting rules accordingly. Once qualifying hours are identified in your Time & Attendance system, Pay-Net can help copy the QOTC amounts to a memo code that will be used to populate Box 12 of the W2 using code ‘TT’, per current IRS guidelines.

 

Qualified Tips Reporting

Beginning in 2026, Qualified Tips will be required to be reported separately on federal tax forms (like the W2).

This does NOT change tax withholding, there are NO changes to paycheck calculations, this is a federal tax return benefit ONLY!

Qualified Tips do NOT include service charge structures and are limited to those industries and labor positions designated as qualified by the IRS. Current guidelines allow for up to $25,000 in deductible qualified tip income, with phase-out beginning at modified adjusted gross incomes of $150,000 for single filers, and $300,000 for joint filers.

 

In Pay-Net’s system, Qualifying Tips MUST be paid via earning codes associated with the following types: 

  • ‘Cash Tips’ – cash reported to the employer, received as tips
  • ‘Charged Tips’ – those tips accumulated through electronic transactions
  • ‘Banquet Tips’ – cash reported to the employer, received as tips while working a banquet or event
  • IMPORTANT: wages paid under earning codes with the ‘Banquet Earnings’ type will NOT be included, as they are deemed “involuntary” or “service charges”, and do not qualify for the tax deduction.

 

You can review your earning code setups here:

 

In Pay-Net’s system, in order to pull qualified tips into year-end reporting, qualifying employees MUST be designated as such with a proper Standard Occupational Classification (SOC) Code. These codes correspond to designated Treasury Tipped Occupation Codes (TTOC), but are distinct!

You can find a full listing of the qualifying codes here: https://pay-net.zendesk.com/hc/en-us/article_attachments/37213863173143

Once a qualifying Earning Type has been applied to the Tips earning code(s) on the company level, and a qualifying SOC Code has been applied to the position on the employee level, Pay-Net can help copy the Qualified Tips amount to a memo code that will be used to populate Box 12 of the W2 using code ‘TP’, per current IRS guidelines.

 

You can populate SOC Codes on employees here:

 

Additional Resources

 

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