The One Big Beautiful Bill Act (OBBBA) introduces several new and highly discussed tax provisions affecting employees, employers, and families. We’ve been receiving questions around four key areas in particular: deductions for overtime pay, deductions for tip income, changes to the deductibility of employer-provided meals and snacks, and the introduction of “Trump Accounts.”
Below is a high-level overview designed to help you understand what’s changing, what applies for Tax Year 2025, and what action steps may be needed.
New Above-the-Line Deduction for Overtime Pay
The OBBBA creates a temporary above-the-line deduction for certain qualified overtime pay earned by employees.
Key Features
- What qualifies: Only the Fair Labor Standards Act (FLSA)-required premium portion of overtime pay (i.e., the ½ portion of “time-and-a-half”)
- Who may claim: FLSA non-exempt employees
- Annual cap: $12,500 ($25,000 for married taxpayers filing jointly)
- Income phase-out: Begins when modified adjusted gross income (MAGI) exceeds $150,000 ($300,000 joint)
- Reduced by $100 for every $1,000 over the threshold, and is fully phased out at $275,000 ($550,000 joint)
- Effective years: 2025–2028 (with deduction and phase-out amounts indexed for inflation in future years)
Important Tax & Payroll Considerations
- This is a federal income tax deduction, not an exclusion from wages
- Overtime pay remains subject to FICA, FUTA, and state and local taxes
- No change to payroll withholding; employees claim the deduction on Form 1040 when filing
- State tax treatment may differ
Tracking and Reporting Requirements
- For Tax Year 2025 only, there is no employer requirement to separately identify or report the qualifying overtime portion on the W-2 or any other information return
- Employers are encouraged to assist employees by using any consistently applied “reasonable method” to identify and document qualifying overtime pay and report that amount to employees in Box 14 of Form W-2 or on a separate secure statement for 2025
- There will be no penalties for the 2025 year where employers do not separately report the amount
- Beginning in 2026, a dedicated W-2 reporting box with specific coding requirements will be mandatory, and draft forms demonstrating this have already been released
Employer Action Steps
- Configure timekeeping systems to isolate the premium portion of overtime pay
- Document the methodology used for identifying and reporting the qualified overtime pay (especially this year, where reasonable methods are permitted)
- Prepare HR and payroll teams to answer employee questions
- Communicate clearly to employees where to find the information needed at tax time
New Above-the-Line Deduction for Tip Income
The OBBBA also introduces a similar temporary above-the-line deduction for qualified tip income, aimed at individuals working in occupations that customarily and regularly receive tips.
Key Features
- What qualifies: Only “qualified tips,” which must be:
- Voluntarily paid, not subject to negotiation, and determined by the payor (i.e., not service charges or automatic gratuities unless the customer can disregard or modify the amount without consequence)
- Reported on a statement furnished to the individual (Form W-2, Form 1099, or Form 4137 for unreported tips)
- Not received in the course of a specified service trade or business (SSTB)
- For 2025 only, if the occupation is on the published occupation list, the deduction is allowed even if the employer is an SSTB, until final regulations are issued
- Who may claim: W-2 employees and independent contractors, that receive qualified tips in an occupation that customarily and regularly received tips on or before December 31, 2024 (see proposed regulations listing the occupations here)
- The deduction is not available to married individuals filing separately
- Taxpayer must provide a valid Social Security Number on their return to claim the deduction
- Annual cap: Up to $25,000
- Deduction cannot exceed net income from the business in which the tips were earned
- Income phase-out: Begins when MAGI exceeds $150,000 ($300,000 joint)
- Reduced by $100 for every $1,000 over the threshold, and is fully phased out at $275,000 ($550,000 joint)
- Effective years: 2025–2028
Reporting & Transition Relief
- For 2025, Forms W-2 and 1099 will not separately report qualified tips
- Employers are encouraged (but not required) to provide employees with information about their occupation and the amount of tips, for example in Box 14 of Form W-2 or a separate statement
- IRS Notice 2025-69 explains how individuals can calculate and claim the deduction without separate employer reporting
- IRS Notice 2025-62 provides temporary penalty relief for employers and payors for 2025 for not providing separate tip or occupation reporting, as long as the aggregate amount of payments is otherwise correctly reported
Deduction Changes for Employer-Provided Meals & Snacks
The OBBBA confirms and finalizes the Tax Cuts and Jobs Act’s (TCJA) scheduled post-2025 changes. Specifically, for amounts paid or incurred after December 31, 2025, most employer-provided meals for the convenience of the employer become fully nondeductible, with certain limited exceptions.
What to Know
- After December 31, 2025, expenses for meals provided for the convenience of the employer (section 119) and for the operation of employer-operated eating facilities (section 132(e)(2)), including snacks and de minimis fringes, are generally nondeductible
- Existing exceptions continue to apply (e.g., commercial vessels, oil and gas drilling) and the OBBBA expands the exceptions to include certain fishing industry activities as well
- Rules for meals consumed off-site, travel meals, employee events, and similar situations remain unchanged
Ongoing Considerations
- Meals treated as compensation to the employee (and included in the employee’s income) remain deductible by the employer
- Meals provided at recreational or social events for the benefit of non-highly compensated employees remain fully deductible
- IRS guidance and regulations under IRC Section 274 remain relevant for defining “meals,” substantiation, and the application of exceptions
- “Meals” continue to include all food, beverages, and snacks
- Businesses operating employee eating facilities should review Sections 274(o) and 274(e)(8) as amounts attributable to food and beverages sold in a bona fide transaction for adequate and full consideration may still be deductible
Introduction of “Trump Accounts” for Children
The OBBBA establishes a new type of tax-favored savings account designed to benefit children under age 18.
Key Features
- Children born between January 1, 2025, and December 31, 2028, are eligible to receive a one-time $1,000 federal contribution
- This is not income to the child or parent and does not count against the annual contribution limit
- During the “growth period” (before January 1 of the year the child turns 18), investments are limited to eligible mutual funds or ETFs that track a broad U.S. equity index (e.g., S&P 500), do not use leverage, and have annual fees/expenses capped at 0.1% of the investment balance
Contributions
- No contributions are allowed before July 2026
- Annual contribution limit: $5,000 per beneficiary, indexed for inflation after 2027
- Employer contributions permitted up to $2,500 annually, indexed for inflation after 2027
- Employer contributions do count toward the $5,000 annual limit and are excluded from the employee’s income if made under a qualifying plan
Withdrawals & Tax Treatment
- No withdrawals are permitted before January, 1 of the year the child turns 18
- Except for qualified rollovers, ABLE account rollovers, excess contribution removals, or upon death of the beneficiary
- After the growth period, the account functions similarly to a traditional IRA
- Upon withdrawal, earnings and employer contributions are taxable; after-tax contributions are not
Administrative Details
- The Treasury will auto-create the account shell for each eligible child, but a parent, legal guardian, adult sibling, or grandparent (in that order of priority) must activate the account by filing IRS Form 4547 or using the online tool at trumpaccounts.gov
- The child must have a social security number issued before the election is made
- Special “growth period” rules apply until January 1 of the year the child turns 1, after which more standard IRA treatment applies
Final Thoughts
These provisions introduce meaningful, but temporary, tax planning opportunities, along with new administrative and reporting considerations. With many provisions including retroactive transitional relief for 2025, this is an important year for employers and individuals to understand the rules, document reasonable approaches, and prepare for more formal reporting requirements beginning in 2026.
If you need further guidance or have any questions on how these changes may affect your organization or your personal tax situation, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
