One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, as Public Law 119-21, among other provisions, introduces two key provisions of immediate concern to employers, “No Tax on Tips” (Sec. 70201) and “No Tax on Overtime” (Sec. 70202) – effective for tax years 2025 through 2028.

The IRS has released FS-2025-03 with interim guidance on the changes, but more detailed guidance is expected in the coming months.

Employers face new administrative and reporting burdens to support employees claiming these deductions. Failure to comply could result in penalties for inaccurate information returns or withholding errors. By acting promptly, employers can minimize disruptions and avoid penalties (e.g., up to $270 per inaccurate W-2). The following are just some of the concerns and solutions voiced by the business community and their advisors so far, since passage of OBBBA.

Employers, particularly in industries like hospitality, retail, construction, and manufacturing, should prepare for increased administrative complexity. The provisions are retroactive to January 1, 2025, but the IRS has promised transition relief for 2025 to ease the burden.

The IRS will publish a list of qualifying tipped occupations by October 2, 2025. Review this to confirm employee eligibility. Expect updated withholding tables, forms (e.g., potential new boxes on W-2 for tips/occupation or overtime), and publications (e.g., Pub. 15 for withholding). The IRS has indicated further guidance on reporting and anti-abuse rules is forthcoming. For 2025, use a “reasonable method” (to be specified by the IRS) to approximate and separately account for tips and overtime if full tracking isn’t feasible.

Integrate software updates to track and report tips (including occupation) and qualified overtime separately. This may require new fields in payroll systems for FLSA overtime premiums. Review employee classifications under FLSA to ensure accurate overtime qualification – misclassification could lead to disputes or audits. Adjust for the expanded FICA tip credit if in beauty services; calculate and claim it on Form 8846 to offset payroll taxes.

Employers must now separately report the total amount of cash tips (including charged tips and tip-sharing arrangements) and the recipient’s occupation on information returns (e.g., Form W-2 for employees or Form 1099 for non-employees) filed with the IRS or Social Security Administration (SSA). This must also be included on statements furnished to workers. Only “qualified tips” (voluntary payments from customers, not mandatory service charges or negotiated fees) in occupations customarily receiving tips qualify.

The law extends the existing FICA tip credit (under IRC Section 45B) to beauty service establishments (e.g., barbering, hair care, nail care, esthetics, and spa treatments), previously limited to food and beverage industries. This allows eligible employers to claim a credit for their share of Social Security taxes paid on employee cash tips.

Employers should maintain detailed records of tips to prevent reclassification abuse (e.g., labeling wages as tips). The IRS may issue regulations to address potential misuse.

Note that these provisions do not affect state taxes or overtime laws (e.g., California’s daily overtime rules), so maintain separate compliance with unique state tax and payroll laws. The provisions expire after 2028, so plan for potential reversions in reporting and withholding.

Also note that these tips and suggestions are taken from various information sources across the country, and may or may not accurately reflect the new employer obligations as they interpreted by the accounting and tax law industry. This report is not provided as a substitute for legal or accounting advice. It should only be considered as topics of interest that need further inquiry by employers should they have concern about any one of these tips.