The One Big Beautiful Bill Act (OBBBA or OB3), signed into law on July 4, 2025, allows employees to deduct qualifying tips and FLSA overtime premium compensation from federal taxable income when filing their individual federal tax returns, retro to January 1, 2025.
Importantly, there is no change to payroll calculations at this time—overtime and tips remain taxable within payroll processing.
On November 5, 2025, the U.S. Treasury Department and IRS issued Notice 2025-62, which states employers will not be penalized this year for not providing the newly mandated reporting breakdowns. This relief gives time to employers to prepare for the act’s new reporting requirements. However, the IRS is encouraging employers to proactively provide employees with their 2025 overtime and tip information so workers can claim the new deductions accurately. With that in mind, CSC Paymaster will not display the overtime premium on 2025 W-2s. Separate statements detailing each employee’s qualified tips/overtime premium compensation can be generated upon request.
Key Takeaways
- 2025 Is a Transition Year
- The IRS will not impose penalties in 2025 for missing reporting details required under OBBBA.
- Full compliance begins January 1, 2026.
- Starting in 2026, employers must separately track and report qualified overtime income.
- “No Tax on Overtime”
- Eligible employees may be able to deduct the FLSA overtime premium (the half-time portion) on their tax return.
- Only the premium portion of FLSA overtime paid for hours worked over 40 in a workweek qualifies.
- Excluded Overtime: Overtime paid for work on Sundays or holidays is not eligible under OBBBA.
- Overtime Must Be Categorized Correctly in Payroll
- Standard (FLSA) overtime should continue to be paid under the standard overtime earnings code.
- Overtime paid for Sundays or holidays must be paid using a separate earnings code so it can be properly tracked and excluded. Contact your Payroll Account Representative for assistance.
- “No Tax on Tips”
- Employees who receive qualified tips may be eligible for a new tax deduction on their individual tax returns.
