OBBBA NEW TAX DEDUCTIONS ON TAX FORM 1040 RETURNS
As employees begin preparing 2025 tax returns, questions are emerging around the proper reporting of Qualified Overtime Premiums and Qualified Tips Income on Form 1040. While these amounts are ultimately reported by the employee on 2025 returns, employers can play a critical role in helping employees come up with accurate “estimates” for these valuable deductions. This article provides some guidance for employers who may wish to assist employees in calculating amounts for 1040 reporting, and breaks down how AccuPay has approached these calculations to create reports that will be beneficial to our employer clients.
Since the legislation for “no tax on tips, no tax on overtime” was not enacted until mid-2025, gathering precise overtime premium and tip information retro to Jan 1, 2025 proved difficult for employers and their payroll companies. To make it more complicated, additional interpretation/IRS guidance was added in the late fall, much too late for payroll software to be correctly updated for year-end 2025. Still, some employers chose to report this information on employee W-2s in box 14, something AccuPay did not feel was “best practice” for 2025, since we witnessed so many employers/payroll companies making inaccurate, retroactive calculations of qualified overtime premiums mandated by Fair Labor Standards Act. We have seen software generated reports which “look nice” but are substantially incorrect as to the figures reported on W-2 forms. Therefore, we did not “opt-in” to 2025 W-2 reporting, as we could not in good conscience provide W-2 calculations that we could not prove accurate.
Instead, AccuPay chose to build our own custom reports for our clients showing “qualified overtime premium” and “qualified tip income” based on these underlying concepts:
Tip income is rather straight forward. Our reports, and Box 7 of each tipped employee’s W-2, report tips paid to employees by customers via cash, credit card, or via pooled tip arrangements, etc. —-We recommend that each of your tipped employees consult with the IRS or their CPA/tax advisor as to whether they are in an occupation which qualifies for the tipped income deduction—-in this manner, you are not advising your employees as to whether they are entitled to the tip income deduction, you are simply providing them with a report of tip income they earned from you during 2025. For reference, the IRS has compiled a list of 68 occupations which are eligible for the Form 1040 “qualified tip income” deduction.
The Qualified Overtime Compensation Premium is a bit more complex as to concept and calculations. In creating reports for our employer-clients, AccuPay “mined” overtime compensation income as “step 1.” The “qualified overtime premium” Form 1040 deduction is equal to the FLSA MANDATED overtime premium which an employer must pay to an employee who worked in excess of 40 hours per “work week” (7 days). This premium is 50% more than the employee’s regular wage amount. Essentially, the “half” portion of “time and a half” is what the employee can deduct on their Form 1040. For example – a non-exempt employee has a regular wage rate of $30 per hour and works 50 hours in a work week. The deductible qualified overtime premium is $15 per hour on the 10 hours of overtime—–OR if all overtime is reported for payroll in total, it is 1/3 of the total over-time pay.
If an employee is paid “double time” only the “half” portion is “qualified” for the overtime deduction. From the example above, if the employer pays “double time” or $60 per hour, ONLY THE SAME “HALF” portion of $15 per hour is mandated by the FLSA for overtime payment—-the extra $15 per hour for “double time” is not “qualified” for the overtime premium deduction on the employee’s Form 1040—-OR if all double time overtime is reported in total, the qualified premium amount for double time is ¼ of total double overtime compensation.
Qualified Overtime Compensation Premium for tipped employees who also work overtime is confusing and very complex IF the employer pays the tipped employee a “base wage amount” which is $7.25 per hour/Federal minimum wage or less. This is due to the “tip tax credit” reduction in minimum wage required by employers with tipped employees. An employee who earns $2.13 per hour in wages plus tips must be paid $10.875 per hour less a “tip credit” amount of $5.12, OR $5.76 per hour for wages worked in excess of 40 per workweek. The “qualified overtime premium” for a tipped employee who earns $7.25 per hour in regular wages is $3.625 per hour of overtime worked (hours worked in excess of 40 per week). A tipped employee who is paid more than $7.25 per hour in wages calculates their “qualified overtime premium” in the same manner as other non-tipped employees. A tipped employee who is paid a base wage of $8 per hour plus tips has qualified overtime premium of $4 per hour just like a non-tipped employee.
REPORTING REQUIREMENTS BY EMPLOYER ON W-2 FORMS
Employers were not required to report either qualified overtime or qualified tip income on employee W-2 forms for year 2025 due to the mid to late year legislation and IRS guidance. HOWEVER, employers are required to report this information on 2026 W-2 forms, which have already been drafted and include new boxes and “codes” to report Jan-Dec 2026 qualified OT/tip income.
Employees who earned overtime and/or tip income during 2025 claim the deductions on a new schedule in their annual Form 1040 IRS tax return. Employees are guided to gather information from all sources available to them, and technically can deduct “reasonable estimates” of their 2025 qualified tip/overtime amounts.
We believe employers should assist their employees with figures from payroll records for 2025, BUT we felt that reporting those figures on W-2 forms, which was NOT required, suggested a level of accuracy and “tax advice” beyond what the employer would choose to take responsibility for (in particular as to overtime premium calculations, but also as to “tipped employee eligibility based on IRS “occupation codes.”)
LINKS/IRS GUIDANCE FOR EMPLOYEES TO CALCULATE AND DEDUCT THEIR QUALIFIED TIPS/OVERTIME PREMIUM FOR 2025
IRS Notice 2025-69, which informed individuals on how to calculate/claim the deductions—-valuable to employers also!! https://www.irs.gov/pub/irs-drop/n-25-69.pdf
IRS Fact Sheet 2026-01 which includes IRS FAQ’s about the brand new Qualified Overtime Compensation deduction https://www.irs.gov/newsroom/questions-and-answers-about-the-new-deduction-for-qualified-overtime-compensation
“Proposed rule” by the IRS which lists 68 tipped employee occupations which are generally eligible for the Qualified Tip deduction https://www.federalregister.gov/public-inspection/2025-18278/occupations-that-customarily-and-regularly-received-tips-definition-of-qualified-tips
IF YOU HAVE ANY QUESTIONS ABOUT THIS INFORMATION, CONTACT YOUR PAYROLL SPECIALIST AT 317-885-7600
This PayDay is for educational purposes only and does not constitute tax and/or legal advice. Any links to external resources are for educational purposes only. AccuPay is not affiliated with nor receives any renumeration from any outside sources. Please consult with your tax and/or legal advisor before applying any suggestions made here or through external links.