Table of Contents

How will Payroll System handle OBBBA tips and overtime deductions?

Eric Updated by Eric

The OBBBA signed into law on July 4, 2025, allows taxpayers to claim deductions for eligible tips and overtime that are reported on W-2s.

In August, the IRS announced there would be no changes to the 2025 W-2 forms and 1099 forms.

How does this change withholding?

IRS guidance is to not change withholding for 2025.

How will Tips and Overtime be reported on W-2s?

Eligible overtime and tips that are input on the Payroll Data grid using the appropriate income items will continue to flow to the traditional locations, including (if mandated by the IRS) to Box 12 under new codes.

For overtime, only the premium time is deductible. In other words, the entire time-and-a-half isn't deductible, only the "half" part is.
Furthermore, only overtime that conforms to federal standards is deductible. See the next question.

What should employers do in states that don't conform to federal overtime rules?

Only overtime that conforms to federal standards is deductible.

For example, California considers overtime not only to be time worked after 40 hours per week, but also time worked more than 8 hours in one day. The latter does not conform to federal standards, so it is not deductible.

Later in 2025, a worksheet will be added to Payroll System 2025 for users in such states to calculate the correct overtime deduction amount.

How did we do?

How to switch browsers without changing the default

Important Deadlines

Contact