As we previously reported, H.R.1, the One Big Beautiful Bill Act (the Act), was signed into law on July 4, 2025. The Act includes a federal income tax deduction for qualified overtime and qualified tips, effective for tax years 2025 through 2028.
For tax years 2026 through 2028, employers and payors are expected to report qualified overtime and qualified tip amounts on year-end informational tax returns. While overtime and tip information will be accumulated throughout the year, this is an annual requirement to report qualified amounts to your employees.
Below we provide an overview of these provisions and information on how ADP products are being updated to help support you. Review more information on the Act and these provisions here.
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Provision
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What this Means to You
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Qualified Overtime
Beginning with tax year 2026, employers will need to track and report qualified overtime premium on Form W-2.
"Qualified overtime" compensation means overtime required to be paid under Section 7 of the Fair Labor Standards Act (FLSA). Overtime not required by the FLSA (such as potentially more generous overtime required under state laws, a collective bargaining agreement or paid voluntarily by employers) is therefore not eligible for the deduction. In addition, only the premium portion of overtime may be eligible for the deduction. For example, if an individual is paid $10 per hour for non-overtime earnings, and $15 per hour for overtime, only the $5 per hour premium pay for overtime is eligible for the new tax deduction.
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Functionality for processing of 2026 Qualified Overtime is now available. Amounts of each per payroll will be provided on your company’s Payroll Register reports, beginning with your company’s first payroll processing of 2026.
During payroll, the number of overtime hours and double-time hours entered will be used to calculate an employee’s qualified overtime earnings. The qualified overtime amount will be tracked throughout the year and displayed on the W-2 as required.
ADP TotalSource presumes that any overtime and double-time hours processed meet the requirement for qualified overtime.
If your overtime policy is more generous than required under the FLSA, for example a state-required policy of daily overtime, then you must work with your payroll representative for more information on how to input qualified hours.
Clients with ADP Time and Attendance:
A new data field will be sent from your time and attendance system to the payroll worksheet. This data field represents the system’s determination of an employee’s hours worked past 40 in a workweek. This data field is the number that will be used to determine an employee’s qualified overtime dollar amount. ADP TotalSource encourages you to review your timekeeping records and compare them to your payroll records to confirm if the correct number qualified overtime hours is being recorded.
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Qualified tips
Beginning with tax year 2026, employers and payors will need to track and report qualified tips on Forms W-2 and 1099 series.
"Qualified tips" means cash tips voluntarily provided to an individual in an occupation which customarily and regularly received tips on or before December 31, 2024. "Cash tips" for purposes of the Act include tips received from customers that are paid in cash or charged and, in the case of an employee, tips received under any tip-sharing arrangement.
Additionally, employers and payors will need to report an employee’s/payee’s Treasury Tipped Occupation Code (TTOC) on the Forms W-2 and 1099 series. TTOC is an employee/payee level three-digit number provided by the Department of the Treasury which signifies that the individual works in an occupation that customarily and regularly received tips. Review the list of TTOC indicators here.
Employers and payors will also need to indicate whether they are a specific service trade or business (SSTB) on Forms W-2 and 1099.
Workers in SSTBs are not eligible for the tips deduction and any tip income earned by the worker in an SSTB is deemed unqualified for purposes of claiming the deduction under the Act.
SSTBs include, for example, those providing services in accounting, health, law, actuarial science, athletics, brokerage services, consulting, financial services or the performing arts. We expect additional guidance on SSTBs in 2026.
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Functionality for processing of 2026 Qualified Tips amounts is now available.
Before processing payroll with qualified tips for the first pay date in 2026, a Treasury Tipped Occupation Code (TTOC) must be assigned to individual employees on the Pay Profile. Employees who do not receive qualified tips will not need to be assigned a TTOC.
A TTOC code must be assigned for the payroll system to start accumulating qualified tips for display on the W-2. Tips processed using the standard T code during payroll will be recorded for display.
Navigate to People > Pay Profile > Regular Pay > Treasury Tipped Occupation Code
Select the appropriate code from the drop down list based on TTOC guidance:
Occupations That Customarily and Regularly Received Tips; Definition of Qualified Tips
Review the table Table 1 to Paragraph (f)(1) —Occupations That Customarily and Regularly Received Tips on or Before December 31, 2024
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Impacts to Withholding
The Act did not specifically state that qualified overtime and cash tip amounts would be excluded from withholding. Therefore, all qualified overtime and qualified tip amounts remain subject to withholding.
The IRS recently released Form W-4 for tax year 2026 in which it included the option for employees to reduce their withholding based on expected qualified overtime and qualified tip deductions. Employees interested in reducing their withholding would need to utilize the Deductions Worksheet for Line 4(b) of the form to calculate their reduced withholding amount. Employees are not required to submit a new Form W-4. However, they may submit a new form to account for their expected deductions. Generally, employees who want to decrease their withholdings would do so based upon earnings and taxation in the prior tax year.
In all cases, individuals may want to consult a tax advisor for further guidance on how to prepare their Form W-4.
Have Questions?
Please contact your dedicated service professional with any questions.