Beginning with the 2025 tax year, new federal tax credits commonly referred to as “No Tax on Tips” and “No Tax on Overtime” will allow eligible employees to reduce their taxable income on certain wages. While these credits are claimed by employees on their individual tax returns, employers play a critical role in accurate wage reporting, payroll configuration, and employee education. Flex HR has summarized some key information to help employers properly support employees as they navigate this new law.
Key IRS update for employers
As required by the One Big Beautiful Bill Act (OBBBA), employers will be expected to report qualified overtime and qualified tip amounts on year-end tax returns for tax years 2026 through 2028. While overtime and tip information will be accumulated throughout the year, this is an annual requirement to report qualified amounts to your employees.
However, the IRS has confirmed that Form W-2 will not be updated to separately identify tips or overtime premiums for purposes of these credits. As a result, employees may rely heavily on paystubs, payroll reports, and year-end summaries to calculate their eligible amounts. Jessica Stafford, Flex HR’s Vice President of Payroll Tax advises that “the No Tax on Tips or Overtime credits will offer relief to many employees of our clients, lowering overall tax liability and resulting in a refund or lower tax bill for 2025 – 2028. Employers can benefit from working with an outsourced HR or Payroll firm throughout these years, as employees will need additional documentation to claim this credit, resulting in additional administrative burden at a busy time of year.”
What this does not change for employers
These credits do not alter employer tax withholding obligations. Employers should continue to withhold and report wages as required and follow all federal, state, and local wage and hour laws. There is currently no requirement to reissue W-2s, adjust withholding, or certify employee eligibility.
Understanding the nuances and limitations of each credit
The No Tax on Tips credit applies only to certain federally defined occupations. Eligibility is based on job classification, not employer discretion. Employers should avoid making assumptions about eligibility and focus on ensuring tips are accurately reported.
Only overtime required under Section 7 of the Fair Labor Standards Act (FLSA) qualifies, and only the premium portion of time-and-a-half pay may be eligible. State-mandated overtime, double time, holiday premiums, shift differentials, union overtime, and compensatory time generally do not qualify.
The IRS has shared guidance on how to calculate overtime, represented as an example in the graphic below.
Payroll reporting considerations
Some payroll providers may report overtime premiums in Box 14 of Form W-2, but practices are not standardized. Employers should understand how their payroll provider calculates and displays overtime and avoid advising employees to estimate eligibility. As Nancy Sanchez, Flex HR’s VP of Payroll says: “These new credits are great news for employees, but clear and accurate payroll reporting is key to help prepare for the years ahead, as these changes will impact 2025 through 2028. Employees should be able to pull their last paystub and use the IRS’s calculation methods and examples to estimate eligible overtime. However, employers can also choose to simplify this process in the years to come by adding a dedicated premium overtime earnings code. Flex HR’s payroll team is here to assist with setup, reporting, and ongoing guidance so everyone can navigate these changes with confidence.”
Final takeaways for employers
These credits can benefit employees but add complexity. Employers are not responsible for determining eligibility, but clear payroll reporting and thoughtful communication can help minimize confusion and risk. Employers may wish to inform employees when year-end forms will be available, how to access payroll records, and that eligibility depends on federal definitions. This support will be pivotal as employees navigate these changes.
If you require assistance with payroll, payroll tax, or other compliance needs, Flex HR is available to support you. Our customized solutions will bring clarity and confidence to all of your HR and payroll needs. Learn more today!