OBBB and Employers: Tips, Overtime, Trump Accounts

The OBBB, signed into law on July 4, made sweeping changes to the IRC, including several changes to compensation and benefits provisions that affect employers. On Aug. 7, the IRS announced that withholding tables and reporting obligations will not be changing for 2025 and that transition relief guidance is forthcoming.

Deduction for qualified tips and overtime pay

Retroactively effective from Jan. 1, 2025, through Dec. 31, 2028, the OBBB permits an individual income tax deduction for qualified tips and overtime pay. There are important limitations and income phase-outs for individuals to be aware of, and employers will have new reporting and compliance obligations.

Qualified tip deduction

Up to $25,000 of qualified tips can be deducted. The $25,000 cap is reduced by $100 for each $1,000 by which the taxpayer’s modified adjusted gross income exceeds $150,000 ($300,000 in the case of a joint return). Married individuals must file a joint return to be eligible for the deduction.

Tips are qualified tips only if all the following apply:

• The tips are paid in cash, by credit card, or are received under a tip-sharing arrangement
• The tips are voluntarily paid by the customer or client
• The tips are received by an individual in an occupation that “customarily and regularly” received tips on or before Dec. 31, 2024

The secretary of the treasury is required to publish a list of qualifying occupations that customarily receive tips within 90 days of July 4, the date of enactment of the OBBB.

Crowe observation

Until the U.S. Department of the Treasury publishes a list of qualifying occupations, it is uncertain which occupations are eligible for the qualified tip deduction.

Employers and payers must report the total amount of qualified tips and the occupation of the individual receiving the tips on Form W-2, “Wage and Tax Statement,” Form 1099-NEC, “Nonemployee Compensation,” and Form 1099-K, “Payment Card and Third Party Network Transactions.”

• Individuals are eligible for a deduction only for qualified tips that are reported on Form W-2, Form 1099-K, or Form 1099-NEC, or for tips reported by the taxpayer on Form 4137, “Social Security and Medicare Tax on Unreported Tip Income.”

Deduction for overtime pay

Retroactively effective from Jan. 1, 2025, through Dec. 31, 2028, the OBBB permits a deduction for overtime pay. Up to $12,500 ($25,000 in the case of a joint return) of qualified overtime compensation can be deducted. The allowable deduction is reduced by $100 for each $1,000 by which the employee’s modified adjusted gross income exceeds $150,000 ($300,000 in the case of a joint return). Married individuals must file a joint return to be eligible for the deduction.

Qualified overtime compensation means the premium-only portion of overtime paid to an individual as required under Section 7 of the Fair Labor Standards Act of 1938 (FLSA). Employers and payers must report the total amount of overtime pay on Form W-2 or Form 1099-NEC as appropriate. Employers will need to bifurcate the premium-only portion of overtime compared to total overtime paid and determine what overtime is deductible compared to what may not be deductible (such as voluntarily paid overtime or overtime required under certain state laws that exceed FLSA requirements).

Employer key takeaways

New withholding procedures to account for the deductions are expected for calendar year 2026. For 2025, no change in withholding or reporting will be required.

Crowe observation

For both qualified tips and qualified overtime pay, employers will need to change their Form W-2 and Form 1099 reporting processes to comply with the new reporting requirements.

Trump accounts

Effective for tax years beginning after Dec. 31, 2025, the OBBB enacted Section 530A, creating new “Trump accounts,” which are tax-advantaged custodial accounts for eligible children under the age of 18 who have a Social Security number. Unlike distributions from Section 529 accounts, which must be used for certain qualifying educational purposes, there is no limit on how beneficiaries can use funds distributed from Trump accounts.

Generally, contributions of up to $5,000 (indexed for inflation after 2027) can be made to a Trump account annually, which is permitted until the calendar year in which the beneficiary reaches age 18. Distributions generally are prohibited until the calendar year in which the account beneficiary reaches the age of 18. Income earned by the account is not taxed, but beneficiaries are taxed when an amount is distributed.

Employers can make nontaxable contributions of up to $2,500 (indexed for inflation) to Trump accounts of employees or their dependents. The contributions count toward the $5,000 annual limit and must be made pursuant to a written program that complies with various nondiscrimination, notification, and reporting requirements.

The OBBB also includes a pilot program that allows a $1,000 credit for amounts contributed to Trump accounts of children born between 2025 and 2028 who have a Social Security number.

Looking ahead

Employers will need to understand and adapt to the changes contained in the OBBB. Additional guidance is expected to be released on these provisions. Until guidance is issued, employers should consult their tax advisers to understand any new obligations and opportunities to provide employee benefits and begin planning for updates to payroll processes.