One Big Beautiful Bill and W-2 Reporting

What Employers Need to Know About the OBBBA Tax Changes

If you felt a bit of a shift in the universe on July 4, 2025, it wasn’t fireworks—it was the federal government dropping the One Big Beautiful Bill Act (OBBBA) right into the laps of employers everywhere. And yes, it’s big. It’s beautiful. And it will absolutely reshape your 2025 and 2026 W-2 processes whether you’re ready or not.

Here we will break it down, laugh a little, and—most importantly—make sure you stay compliant and true to your New Year’s Resolution to “chill more."

So What Did the OBBBA Change? A Lot. Grab a Snack

Change 1. Tips Are Deductible, But Still Fully Reportable

Under OBBBA, employees can deduct up to $25,000 in qualified tips starting with their 2025 tax return. Sounds simple, right?

Here is the catch. You must separately report qualified tips on the W-2 for employees to claim the deduction.

Beginning January 2025 (yes, retroactively), employers must:

• Separately report qualified tips

• Identify the employee’s occupation

• Use new IRS reporting codes

  
  

If you employ tipped workers, congratulations. You are now collecting job codes like they are Pokémon.

Change 2. Overtime Gets Its Own Deduction Line

Employees may now deduct up to $12,500 of qualified overtime, defined as the half-time premium portion of FLSA overtime.

What this means for employers:

• The half-time premium must be tracked separately

• Straight-time pay does not count

• This data must be reported on 2025 W-2s issued in 2026

  
  

Translation for HR and payroll teams: Your payroll system just gained two new best friends: TP (tips) and TT (overtime).

Change 3. W-2 Deadlines Stay the Same, Content Does Not

The W-2 deadline is unchanged. Employers must still furnish W-2s by January 31, 2026.

What has changed:

• More reporting fields

• More codes

• More opportunities to ask, “Why is this happening?”

Change 4. Payroll Withholding Is Not Changing (Cue Employee Confusion)

Employees will ask if these deductions mean larger paychecks. The answer is no.

These deductions apply at tax filing, not during payroll withholding. Paychecks will not increase. Messaging will matter.

Be prepared for the 2026 FAQs:

• Why did my paycheck not change?

• Will I get a bigger refund?

• What are these new codes?

• Is HR just making things up now?

One Big Beautiful Bill W-2 Reporting Tips (Before Payroll Revolts)

Tip 1. Update Pay Codes Now

You need clean, separate tracking for:

• Qualified tips (TP)

• Qualified overtime (TT)

• Occupation codes for tipped roles (TTOC)

  
  

The IRS will publish an official list of tip-eligible occupations. Until then, consistency matters.

HR translation: label everything now so you do not cry later.

Tip 2. Document Reasonable Tracking Methods for 2025

Because reporting is retroactive, the IRS is offering transition relief for 2025.

Acceptable reasonable methods include:

• Pulling tipped income from POS systems

• Overtime calculations you can clearly support and reproduce

  
  

Document your approach. You will want that paper trail.

Tip 3. Communicate Early and Clearly

Employee messaging should be simple and factual: “You will not see changes in your paycheck, but your W-2 will look different.”

If you do not explain it, employees will still ask. And they will ask HR first.

Tip 4. Audit Job Titles and Pay Structures

This matters most for:

• Hospitality and food service

• Retail

• Healthcare

• Any overtime-heavy workforce

  
  

Clean titles equal clean data. Messy titles equal W-2 chaos.

Tip 5. Align HR, Payroll, and Finance

Any team that touches tips or overtime now feeds the W-2 process. Treat this as an all-hands moment.

Avoid common pitfalls:

• Using one generic tips code

• Mixing qualified and non-qualified tips

• Failing to isolate the FLSA half-time premium

A Quick Reality Check...

2024

You: “I finally understand W-2 reporting.”

IRS: “Hold my Bill.”

2025

You: Adding codes, tracking tips, analyzing overtime

Also you: Googling “How to become a lighthouse keeper.”

2026

Payroll system: “TP. TT. TTOC.”

You: “That feels like TMI.”

If You Remember Nothing Else, Remember This...

• Qualified overtime must be separately tracked for 2025 and beyond

• New W-2 codes (TP, TT, TTOC) apply to 2026 reporting

• The W-2 deadline remains January 31, 2026

• Paycheck withholding does not change

• The IRS is offering 2025 transition relief. Use it wisely.

  
  

Tax changes can feel overwhelming. The HR Collaborative team is actively monitoring IRS guidance and will keep you informed as requirements evolve.

Ready for What Comes Next?

👉 Get your 2026 Compliance Calendar

Feeling overwhelmed by new deadlines, new codes, and new reporting rules?

You are not alone. Staying ahead of compliance changes like OBBBA takes planning, coordination, and a clear view of what is coming next.

Our compliance calendar helps you track key HR and payroll deadlines so nothing sneaks up on you.

To receive your copy, simply submit a Contact Us form and include a note that you would like the 2026 Compliance Calendar.

👉 Get support with your employee handbook

Wondering if your employee handbook still supports compliance and clarity?

When reporting rules change, policies and handbooks often need to follow. Clear guidance helps reduce confusion and protects your organization.

Whether you need a handbook created or refreshed, we can help. Submit a Contact Us form and let us know you are looking for handbook support.

👉 Take our HR Health Assessment

Not sure where to start with your HR systems or compliance readiness? Big changes like new W-2 reporting requirements often surface gaps in processes, documentation, and communication.

Take our free 15-minute digital HR Health assessment to help identify where your HR practices are strong and where you may need support as requirements evolve.