The One Big Beautiful Bill Act: What SMBs need to know about payroll and time tracking changes

Starting with the 2026 tax year, employers must report qualified tips and qualified overtime separately on employee W-2s, and those forms are due by January 31, 2027. The requirement comes from the One Big Beautiful Bill Act (OBBBA), which President Trump signed into law on July 4, 2025. The IRS now refers to the law as the Working Families Tax Cuts.

The law’s best-known payroll provisions, no tax on tips and no tax on overtime, took effect retroactively to January 1, 2025. But 2025 was a grace year. The IRS treated it as a transition period and left W-2 and 1099 forms unchanged, so workers claimed the new deductions directly on their 2025 returns. That penalty relief covered 2025 only. For 2026, separately reporting qualified tips and overtime on W-2s is mandatory, and missing or inaccurate figures can draw penalties.

The stakes go beyond penalties. Starting in 2026, employees can generally deduct only the qualified overtime their employer reports on the W-2. If your payroll gets that number wrong, your workers lose part of a deduction they earned.

If you employ tipped or overtime workers in healthcare, construction, field services, retail, restaurants, bars, salons or hotels, the “we’ll deal with it later” window has closed. Here’s what changed, what your payroll and time tracking systems need to do and the deadlines that matter now.

What the One Big Beautiful Bill Act changes for employer payroll in 2026

Four parts of OBBBA land directly on payroll. Three are reporting obligations with real deadlines; the fourth is optional but worth knowing.

1. No tax on tips: a federal deduction for qualified tip income, for 2025 through 2028.
2. No tax on overtime: a federal deduction for the Fair Labor Standards Act (FLSA) overtime premium, for 2025 through 2028.
3. Form 1099-NEC changes: new fields for tips and qualified overtime paid to nonemployees, plus a higher reporting threshold, starting in 2026.
4. Trump Accounts: a new tax-advantaged savings account for children that employers can optionally fund as a fringe benefit.

The important shift: tips and overtime don’t change what your employees are paid or what you withhold. They’re deductions your workers claim on their own returns. But workers can only claim them if the amounts are tracked correctly all year and reported in the right boxes at year-end. That makes this a payroll and time tracking job long before it’s a tax filing one. The IRS overview of the Working Families Tax Cuts is the plain-language starting point.

How the no tax on tips deduction works for employers

Employees in eligible tipped occupations can deduct up to $25,000 per return per year in qualified tips from their federal income tax, for tax years 2025 through 2028. The deduction phases out once modified adjusted gross income (MAGI) passes $150,000 ($300,000 for joint filers), dropping $100 for every $1,000 above the threshold. It’s available whether or not the worker itemizes.

It is a deduction, not an exemption. Tips stay subject to federal income tax withholding, Social Security and Medicare at the time you cut the check. Workers claim the deduction later, on Schedule 1-A of Form 1040.

What qualifies: voluntary cash tips, card tips and tips shared through a pooling arrangement, received in an occupation the IRS lists as customarily tipped on or before December 31, 2024.

What doesn’t: mandatory service charges (such as auto-gratuity on large parties), fees you add to the bill and distribute, and tips earned in an occupation that isn’t on the IRS list.

Managers and tip pools: tips a manager or supervisor receives through a tip pool aren’t qualified tips. Tips a manager receives directly while doing work in a listed tipped occupation can still qualify.

Which occupations qualify for the no tax on tips deduction?

The IRS list of occupations that customarily and regularly received tips is now final. It covers 71 occupations across 8 categories and was finalized in Treasury Decision 10044 in April 2026. You can look up your employees’ roles and their matching three-digit codes at IRS.gov/TippedOccupations. You’ll need those codes for year-end reporting.

How to report qualified tips on the 2026 W-2

Starting with 2026 W-2s (the ones you’ll file in early 2027):

• Box 12, Code TP: total cash tips the employee reported to you. Report the full amount, not only the portion you think is deductible. The $25,000 cap is applied on the worker’s return, not in your reporting.
• Box 14b: the Treasury Tipped Occupation Code (TTOC) for the role, up to two codes. If any tips came from a non-qualifying occupation, one of the codes must be 000.

Tips still flow into Boxes 1, 5 and 7 as they always have. For the full field-by-field breakdown, the IRS 2026 General Instructions for Forms W-2 and W-3 is the source of record.

How the no tax on overtime deduction works for employers

This deduction covers only the premium portion of overtime: the “half” in time-and-a-half, and only when the FLSA requires the overtime. Employees can deduct up to $12,500 ($25,000 for joint filers) for 2025 through 2028, with the same MAGI phase-out as tips ($150,000 single / $300,000 joint). Like tips, it’s a deduction workers claim on Schedule 1-A, not a change to withholding.

The FLSA-only rule is the catch, and it’s where time tracking earns its keep. These don’t qualify:

• State-mandated overtime (for example, California’s daily overtime rules)
• Overtime required by a union or collective bargaining agreement
• Voluntary or contractual overtime your policy pays but the FLSA doesn’t require

The same logic applies to premium rates above time-and-a-half. If you pay double time for FLSA overtime hours, only the premium the FLSA requires counts as qualified overtime.

The premium math: a worker earning $20/hour who works 50 hours in a week is paid $30/hour for the 10 overtime hours. Only the $10 premium per hour counts, so that week has $100 of qualified overtime ($10 × 10), not the full $300 of overtime pay. Your system has to isolate that premium from the gross overtime figure. See the Department of Labor’s overtime rules under the FLSA for what counts as required overtime.

How to report qualified overtime on the 2026 W-2

• Box 12, Code TT: total qualified overtime compensation (the FLSA premium only). Report the full qualifying premium you paid, even if it exceeds the employee’s $12,500 / $25,000 deduction cap. The cap is applied on the worker’s return, not in your reporting.

Mapping your entire overtime earnings line to Code TT is the most common mistake here. Code TT is the premium, not total overtime pay.

Why Box 12 Code TT decides what employees can deduct

For 2025, employees could estimate their qualified overtime from their own records. That option is gone for 2026. Under the IRS’s updated overtime FAQs (FS-2026-13), released in August 2026, employees may generally deduct only the qualified overtime reported in Box 12, Code TT. They can’t use Form 4852 (Substitute for Form W-2) to claim overtime their employer didn’t report.

That puts the outcome in your hands. If your payroll under-reports Code TT, your employees lose part of their deduction. If it over-reports by mapping total overtime pay, you’re filing an inaccurate W-2.

What employers need to know about Trump Account contributions

OBBBA created Trump Accounts, a tax-advantaged savings account for children under 18 that works much like a traditional IRA. Total contributions are capped at $5,000 per child per year, and children born between 2025 and 2028 receive a one-time $1,000 seed contribution from the federal government.

You aren’t required to offer or fund them. But OBBBA (Section 128) lets you offer contributions as a fringe benefit. With a formal written Trump Account Contribution Program in place, you can contribute up to $2,500 per employee per year, excluded from the employee’s gross income for federal income tax. Those contributions are still subject to Social Security, Medicare and Federal Unemployment Tax Act (FUTA) tax. Employees can also fund a child’s account through payroll, pre-tax through a Section 125 plan or with after-tax dollars.

Two limits to know before you set one up. Business owners such as sole proprietors, partners and more-than-2% S corporation shareholders can’t receive tax-free employer contributions. And the IRS rules for employer programs are still proposed regulations, so details may change.

Reporting: qualifying employer contributions go in Box 12, Code TA on the 2026 W-2. As with tips and overtime, this reporting starts with the 2026 tax year.

If you’re weighing this as a retention benefit, start at trumpaccounts.gov and the IRS Trump Accounts page, then talk to your benefits advisor before you commit to a program.

What changes on Form 1099-NEC for 2026

Starting with tax year 2026 (forms issued in January 2027), Form 1099-NEC gets new fields:

• Box 1a: total nonemployee compensation (what used to sit in Box 1)
• Box 1b: cash tips, included in 1a, for the recipient’s tip deduction
• Box 1c: the Treasury Tipped Occupation Code
• Box 1d: qualified overtime compensation, included in 1a, for the recipient’s overtime deduction

The tip boxes exist because self-employed workers can claim the tip deduction too, as long as they work in a listed tipped occupation and their business isn’t a specified service trade or business. Overtime is different. Qualified overtime appears on a 1099-NEC only in the rare case where a worker counts as an employee under the FLSA but is treated as an independent contractor for federal tax purposes. For most businesses, Box 1d stays empty.

There’s also a threshold change: for 2026, Form 1099-NEC is only required for contractors you paid $2,000 or more during the year, up from $600. Starting in 2027, that threshold adjusts for inflation. The IRS instructions for Forms 1099-MISC and 1099-NEC have the details.

OBBBA reporting timeline: 2025 through 2028

The first year of mandatory reporting is 2026, and the forms are due in early 2027. Here’s where things stand and what’s left to do:

• 2025: A transition year. The IRS left W-2 and 1099 forms unchanged and let workers claim the tip and overtime deductions directly on their 2025 returns using a reasonable method (IRS guidance for 2025). No employer penalties for missing breakdowns.
• Now, before year-end 2026: Make sure every tipped and overtime earning is classified correctly in your payroll system, and that each tipped employee is matched to the right Treasury Tipped Occupation Code. Getting this right across the whole year is what makes year-end reporting clean.
• By January 31, 2027: File 2026 W-2s and 1099-NECs with the new codes: Box 12 TP, TT and TA, and Box 14b occupation codes on W-2s; Boxes 1b through 1d on 1099-NECs. This is the first year the 2025 penalty relief no longer applies.
• After 2028: The tip and overtime deductions are scheduled to sunset after the 2028 tax year, so you’ll still report them on W-2s issued in early 2029. Unless Congress extends them, you’ll adjust your setup after that. Worth keeping on the radar, not worth planning around yet.

If you’re a Fingercheck customer, the step-by-step for classifying earnings and assigning occupation codes lives in our OBBBA help article. Do the cleanup before mid-December so there’s room to fix anything before W-2s run.

How state tax rules affect the tip and overtime deductions

The tip and overtime deductions apply to federal income tax only. State treatment is a patchwork, because most states haven’t fully conformed their tax codes to the federal changes. States generally fall into three buckets: automatic conformity (federal changes flow through), rolling conformity (some provisions adopted, others not) and fixed-date conformity (nothing changes until the legislature acts).

For a single-state business this is simple. For anyone running payroll across state lines, it’s a real tracking problem: you’re reporting federal qualified tips and overtime one way while handling state wages another, employee by employee. Multi-state and multi-location operators should confirm how each state treats these amounts rather than assuming the federal rule carries over.

One bright spot for owners: OBBBA raised the state and local tax (SALT) deduction cap from $10,000 to $40,000 through 2029, with phase-outs beginning at $500,000 of income. If you’re a pass-through owner in a high-tax state who’s been stuck at the old $10,000 cap, that’s worth a conversation with your accountant.

Other One Big Beautiful Bill Act provisions to discuss with your accountant

These provisions don’t touch your payroll setup, but they matter for year-end planning:

• 20% qualified business income (QBI) deduction, now permanent. The Section 199A deduction for pass-through entities was set to expire; OBBBA made it permanent at 20%. Starting in 2026, owners who actively run a business with at least $1,000 of QBI also get a $400 minimum deduction.
• Bigger write-offs for equipment. Section 179 expensing doubled to $2.5 million ($2.56 million for 2026 after inflation), and 100% bonus depreciation is permanently restored for qualifying assets placed in service after January 19, 2025. If you’ve been putting off a vehicle, time clock or equipment purchase, the timing math looks different now.
• Qualified Small Business Stock (QSBS) improvements. For stock issued after July 4, 2025, the gain exclusion cap rises from $10 million to $15 million, the company asset threshold rises from $50 million to $75 million and partial exclusions start after three years instead of five. This is relevant if you’re considering a C corporation structure or raising investment.

Figures and eligibility here get specific fast and interact with your entity structure. Treat this as a prompt to call your tax advisor, not as filing guidance.

What payroll and time tracking software needs to do for OBBBA reporting

The new rules ask your software for four specific things:

• Separate the FLSA overtime premium from gross overtime pay
• Track qualified tips and flag tips from non-qualifying roles
• Hold a Treasury Tipped Occupation Code for each tipped employee
• Report all of it in the right 2026 boxes: TP, TT and TA on the W-2, Box 14b for occupation codes and Boxes 1b through 1d on the 1099-NEC

The hard part is the first one, and it depends on your time clock and payroll talking to each other. If your time system can’t tell the FLSA premium apart from state or voluntary overtime, or if time and payroll live in separate tools that sync loosely, the premium figure that lands in Code TT is a guess. Since employees can only deduct what’s in Code TT, that’s the gap to close before year-end.

Questions to ask your payroll provider about OBBBA reporting

Before committing to any payroll software, ask:

1. How do you separate the FLSA-required overtime premium from state-mandated, union or voluntary overtime?
2. How do you handle double time, so only the FLSA-required premium lands in Code TT?
3. Can your system hold a Treasury Tipped Occupation Code per employee and report it in Box 14b?
4. How do you distinguish qualified from non-qualified tips?
5. Is OBBBA tip and overtime reporting included in standard service, or is it an add-on?
6. For multi-state employers, how do you handle differing state overtime rules?

How Fingercheck handles OBBBA reporting

Because time tracking and payroll are one system in Fingercheck, the FLSA premium is isolated at the source rather than reconstructed at year-end:

• Overtime: set an earning to the OT – Overtime Wages type and the premium flows to Box 12, Code TT automatically. The Paid Hours With OT Estimate (FLSA OT) report shows the exact premium amount per employee before W-2s run, so you can check it.
• Tips: classify earnings as Tips Qualified or Tips Non-Qualified; qualified tips report in Box 12, Code TP, and non-qualified tips automatically trigger the 000 code in Box 14b.
• Occupation codes: assign an SOC code to each tipped employee and Fingercheck maps it to the Treasury Tipped Occupation Code for Box 14b.
• Trump Accounts: dedicated deduction types handle qualified employer and pre-tax employee contributions and route them to Box 12, Code TA.
• 1099-NEC: the new boxes are supported, and Fingercheck applies the 2026 $2,000 contractor threshold.

That’s flat-rate payroll with unlimited runs and no per-run fees, time and payroll in one place, and the OBBBA reporting built in. The step-by-step setup is here, or see the platform in action.

When to bring in a tax professional for OBBBA compliance

You can likely handle the basics in-house if you run a simple, single-state operation with a handful of employees and payroll software you’ve confirmed supports the new reporting.

Call your accountant or an employment attorney if you have tipped employees in multiple states, complex overtime policies, union contracts, revenue past a few million or major equipment or structure decisions on the table. The interaction between the tip and overtime deductions, the business provisions and state conformity gets complicated quickly, and year-end planning is cheaper than fixing a misfiled W-2.

Getting compliance right

The thing to remember: this is a process change, not just a tax update. Your payroll and time tracking systems are now the tools that determine whether your employees can claim deductions they’re entitled to and whether you file a clean W-2 or a penalty-prone one.

2025 was the practice run. 2026 is the year the reporting counts. The businesses that spend an hour now confirming their earnings are classified correctly and their occupation codes are assigned will have a quiet year-end. The ones that wait will be reconstructing a year of premium math in December. Do the cleanup while it’s easy.

Disclaimer: This article provides general information about the One Big Beautiful Bill Act and should not be considered tax or legal advice. The legislation is complex, and implementation requirements may change as federal agencies issue additional guidance. Always consult with qualified tax professionals and employment law attorneys for advice specific to your business situation. Requirements may vary by state, and businesses operating in multiple jurisdictions face additional complexity requiring professional guidance.

Victoria Davis As the Senior Demand Generation Manager at Fingercheck, I spend my days figuring out what business owners are searching for and making sure we're the payroll answer they find. I'm a seasoned B2B SaaS marketer who believes creativity belongs in every industry. Off the clock, you'll find me cooking and baking, hanging out with my four dogs, or at the local farmers market.

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