Your guide to H.R.1, the One Big Beautiful Bill Act

What is the One Big Beautiful Bill Act (OBBBA/H.R.1)?

The One Big Beautiful Bill Act, also known as H.R.1, OBBBA, or OB3, was signed into law on July 4, 2025. The law includes significant changes affecting taxes, payroll, employee benefits, business tax provisions, qualified overtime deductions, and qualified tip deductions.

What does it mean when people say “No Tax on Tips”?

It means that there is a federal income tax deduction for qualified tips from 2025 to 2028. All tips, including qualified tips, remain subject to applicable withholding requirements and Social Security and Medicare taxes. Eligible individuals may be able to claim a deduction for qualified tips of up to $25,000 on their federal income tax return. The deduction begins to phase out when modified adjusted gross income exceeds the applicable thresholds for single and joint filers

What are qualified tips?

Qualified tips are voluntary cash tips received in occupations that customarily and regularly received tips on or before December 31, 2024, as determined by the Department of Treasury. “Cash tips” can include tips received in cash, by credit card, through certain payment apps, or through eligible tip-sharing arrangements. Treasury provides a list of potentially qualifying occupations and a three-digit Treasury Tipped Occupation Code (TTOC) for each occupation. Individuals may be able to claim a federal income tax deduction for qualified tips.

What does it mean when people say “No Tax on Overtime”?

It means that there is a federal income tax deduction for certain qualified overtime compensation from 2025 through 2028. Only overtime required under the Fair Labor Standards Act (FLSA) may be eligible. Eligible employees may claim a deduction for the premium portion of qualified overtime when filing their federal income tax return, subject to the applicable deduction limits and phaseouts. Overtime remains subject to applicable tax withholding and other payroll deductions.

What is qualified overtime?

Qualified overtime means overtime compensation required under Section 7 of the FLSA, which is generally overtime paid when a nonexempt employee works more than 40 hours in a workweek. Only the FLSA-required overtime premium portion may be eligible for the deduction. Overtime paid for other reasons is not qualified unless it also represents overtime required under Section 7 of the FLSA.

Example: An employee earns $20 per hour and works 40 regular hours plus 10 overtime hours paid at $30 per hour. Total overtime earnings are $300. If all 10 overtime hours are FLSA-required overtime, the qualified overtime premium is $100: the $10 hourly premium multiplied by 10 overtime hours. Only that FLSA-required premium—not the full $300 in overtime earnings—may be eligible for the deduction.

When do the changes under the Act take effect?

Effective dates vary by provision. Some provisions became effective on July 4, 2025, while others applied retroactively to January 1, 2025. For 2025, transition guidance applied, which allowed employers to provide approximate separate accounting of qualified overtime and qualified tip amounts, if they chose to do so. For 2026, transition relief is no longer available. Employers and payors must now report qualified overtime, cash tips, and applicable Treasury Tipped Occupation Codes (TTOCs) on Forms W-2 and 1099, as applicable. Individuals will use the information reported by employers or payors on the Forms W-2 or 1099 to determine if they are eligible for deductions on their federal income tax returns.

Why are the OB3 rules for 2026 different from 2025?

For 2025, transition guidance provided temporary flexibility while employers, payors and payroll systems prepared for the new rules. Beginning with tax year 2026 reporting, employers and payors must follow the new reporting requirements for qualified overtime, cash tips and Treasury Tipped Occupation Codes (TTOCs). As a result, employers and payors should review their information before year-end forms are produced.

Where can I find more information about OBBBA?

Additional resources are available on the ADP One Big Beautiful Bill Hub below, as well as the OBBBA Spark Series and the IRS Working Families Tax Cuts resources.

What should employers do now to prepare for 2026 year-end reporting?

Employers should review their 2026 qualified overtime, cash tip, and Treasury Tipped Occupation Codes (TTOC) information before year-end reporting begins. In particular, employers should:

• Confirm that applicable TTOCs have been assigned to workers with reportable cash tips and are reflected accurately in year-end reporting information.
• Review accumulated qualified overtime amounts and determine whether they appropriately reflect only overtime premium amounts required under the Fair Labor Standards Act (FLSA).
• Make any needed payroll adjustments using the process available for their payroll solution.
• Review year-end information again before Forms W-2 and 1099 are finalized.
• Maintain a process for identifying and assigning applicable TTOCs when employees or payees begin receiving reportable cash tips, including newly added workers, so new gaps do not develop before year end.

What should an employer do if its tip, Treasury Tipped Occupation Code (TTOC) or qualified overtime information does not look right?

Employers should review the underlying employee, time and payroll information and determine whether an adjustment is needed. Employers are responsible for determining the appropriate treatment based on their facts and circumstances. Employers may wish to consult their legal or tax advisor regarding their particular circumstances.

Employees with questions should request information from their employer, and confirm how TTOC code and Qualified Overtime were applied to confirm accuracy.

What happens if required year-end information is missing or incorrect?

Missing or inaccurate information can result in penalties and interest for employers or payors, inhibit workers’ ability to claim eligible deductions, and require employers and payors to submit additional amendments. Depending on the information involved and when it is corrected, an employer or payor may need to take additional filing or correction steps, and may incur penalties or additional charges. Employers should review and correct identified issues before year-end forms are finalized whenever possible

Do the reporting requirements apply to employees who were terminated during 2026?

Yes. An employee’s departure during 2026 does not remove the employer’s applicable reporting obligations.

The employee’s 2026 Form W-2 must include the required cash tips, Treasury Tipped Occupation Code (TTOC), and qualified overtime information as applicable, even if the employee is no longer employed at year end.

Do mandatory gratuities or service charges qualify as qualified tips?

No. Mandatory service charges and mandatory gratuities are not voluntary tips and, therefore, are not qualified tips for purposes of the deduction.

Will qualified tips appear separately on Form W-2 or Form 1099?

No. The form does not have a separate total for “qualified tips.” The new Form W-2 and Form 1099 include information the worker uses to determine qualified tips.

Beginning with tax year 2026, employers and payors will use Forms W-2 and 1099 to report cash tips and a Treasury Tipped Occupation Code, or TTOC occupation-code information. Workers use the reported cash-tip amount and the TTOC to determine qualified tips for purposes of any available deduction. Workers may wish to consult a tax advisor regarding the calculation and deduction.

What is a Treasury Tipped Occupation Code (TTOC) and how is it used?

A Treasury Tipped Occupation Code (TTOC) is a three-digit code for an occupation that the Department of Treasury has identified as customarily and regularly receiving tips. Employers and payors must select at least one (and no more than two) TTOCs for each worker with reportable cash tips. Employees and payees use the information, together with reported cash tips, in determining qualified-tip amounts and any available deduction on their federal income tax return.

What does code 000 mean on Form W-2 or Form 1099?

Code 000 indicates that the worker received cash tips for work that is not associated with an occupation on Treasury’s list of occupations that customarily and regularly received tips. In practical terms, code 000 signals that the worker earned some amount of tips that are not eligible to be considered as qualified tips. A worker may therefore have both a qualifying Treasury Tipped Occupation Code (TTOC) and code 000 if the worker received reportable cash tips from different types of work during the year.

What reporting responsibilities do employers and payors have for qualified tips?

Employers and payors must track and report cash tips and applicable Treasury Tipped Occupation Code (TTOC) information in accordance with IRS requirements. Employers should also distinguish voluntary cash tips from non-voluntary payments such as mandatory service charges or gratuities, which are not treated as cash tips for purposes of the qualified-tips deduction.

Do qualified-tips reporting requirements also apply to Form 1099?

Yes, the 2026 reporting rules include applicable payees who receive reportable cash tips. Applicable Forms 1099 report cash tip and Treasury Tipped Occupation Codes (TTOCs) payees may use when determining qualified tips and any available deduction. Employers and payors should use the reporting process applicable to the form and payee population involved.

Are all overtime or premium payments qualified overtime?

No. Employers may pay overtime or premium compensation for reasons that go beyond the federal FLSA requirement, including state-law requirements, collective bargaining agreements, employer policies, holidays, daily overtime or double-time arrangements. In addition, some employees or types of work may not be subject to the FLSA overtime requirement because an exemption or other FLSA rule applies. Some payments may overlap with FLSA-required overtime and some may not. Employers should determine what portion, if any, reflects the FLSA-required overtime premium based on their particular facts and may wish to consult legal or tax advisors as appropriate.

How should employers determine what overtime should be reported as qualified overtime?

Employers should identify when and why overtime was paid and determine whether the overtime was required under Section 7 of the FLSA. Additional review may be appropriate when overtime results from state requirements, collective bargaining agreements, employer policies, daily overtime, double time or other rules that go beyond the federal FLSA requirement. Only the applicable FLSA overtime premium may be reported as qualified overtime. Employers are responsible for determining the appropriate treatment based on their facts and circumstances and may wish to consult legal or tax advisors as appropriate.

Will qualified overtime appear separately on Form W-2?

Yes. Beginning with tax year 2026 reporting, the aggregate premium portion of qualified overtime compensation is separately reported in Box 12 of Form W-2 using code TT.

Is Box 12 reporting required for qualified overtime?

Yes. If an employee received qualified overtime compensation during the year, the employer must report the total qualified overtime premium amount in Box 12 of Form W-2 using code TT.