Compliance
Compliance Alert: Preparing for the New Reporting Obligations on Tips and Overtime Under OBBBB
The One, Big, Beautiful Bill introduces deductions and reporting requirements for tips and overtime—find out who’s affected, what mining is underway, and how to avoid penalties in tax years 2025–2028.
By NomadicTax Research Team • 5-8 min read • November 20, 2025
## What’s changing under OBBBB?
The law amends how tips and overtime compensation are treated. Effective for **tax years 2025 through 2028**:
- **Qualified tips**—those customs and regular earnings in certain occupations—can be deducted. Employees and self-employed individuals may deduct tips reported via W-2, 1099, or other specified statements. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-provisions?utm_source=openai))
- **Qualified overtime compensation**—the portion that exceeds the regular rate of pay (e.g., the “half” portion of “time-and-a-half”) — is now deductible subject to limits. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-provisions?utm_source=openai))
- Earnings above listen to Social Security/Medicare withholding are still fully taxable; what changes is only the deduction rules.
## New Reporting Responsibilities & Relief
- Employers, tip-payers, and other payors will need to report the total cash tips and overtime compensation in occupations that **customarily and regularly receive tips**. This is a new obligation under section 6050AA for overtime/tips reporting.
- The IRS offers **transition relief for 2025**: penalties under sections 6721 and 6722 won’t be enforced if the statements required for 2025 are furnished under the relief guidance. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-provisions?utm_source=openai))
## Who is impacted?
- **Employees in service industries**: bartenders, bellhops, hairdressers, taxi drivers, servers, etc.—if their occupation was customarily and regularly receiving tips as of December 31, 2024.
- **Self-employed individuals** if they receive tips and fall under similar occupational categories.
- **Employers and payors**—if they are responsible for furnishing statements or information returns.
## Hypothetical example
Sarah works as a bartender and regularly receives tips. In 2025, her reported tips exceed $25,000, but her AGI is $160,000. Under OBBBB, she can still deduct her qualified tips—subject to **phaseout rules**. Her employer will need to issue a statement showing her tips and report total tips paid. Because of transition relief, if they provide a statement as required in 2025, they avoid certain penalties.
## Action plan to stay compliant
1. **Individuals**: Start tracking your tips and overtime income along with the required statements. Confirm if your employer will report. Save all documentation.
2. **Businesses/employers**: Identify which employees and occupations qualify. Update payroll systems to record cash tips, verify occupations as of Dec 31, 2024. Be ready to furnish statements and ultimately file info returns per the law.
3. **Consult your tax professional**: with AGI nearing thresholds, potential for misclassification, or if unique tip/overtime situations (shared tips, tip pooling), consulting early minimizes risk.
## Why it matters now
These aren’t just theoretical deductions—they shift the employer-employee relationship around tip documentation and record-keeping, introducing compliance complexity. Businesses that fail to update procedures risk penalties in future years. Individuals could miss out on deductions if they lack supporting statements. Understanding these shifts now ensures smoother transition into full reporting requirements for 2026+.