Quick Hits
- The IRS unveiled a new set of detailed FAQs on August 6, 2026, that supersede FAQs that were posted on January 23, 2026, regarding taxation of tips and overtime pay under 2025’s omnibus spending bill.
- The new FAQs provide information concerning the definition of qualified overtime, eligibility for the deduction, tax withholding obligations, and reporting and correcting qualified overtime on year-end tax forms.
- The “no tax on tips and overtime” provisions are set to expire on December 31, 2028.
In July 2025, President Donald Trump signed an omnibus spending bill that specified no taxes on tips and overtime pay through December 31, 2028. These provisions are available whether the worker itemizes or takes the standard deduction.
Qualified Overtime Deduction
The FAQs clarify that overtime compensation not required by the Fair Labor Standards Act (FLSA) is not eligible for the tax deduction. To deduct qualified overtime, an employee must be covered by the FLSA and must not qualify for an overtime exemption, such as the one for executives, administrators, and professionals.
Business owners who own at least 20 percent of their business and actively participate in management generally are not eligible to deduct qualified overtime because they are considered exempt executive employees under the FLSA. Individuals who own less than 20 percent of their business may qualify for the overtime deduction if they are not covered by a different overtime exemption.
Qualified overtime is limited to the premium portion of overtime pay required under the FLSA—i.e., the 0.5 premium amount. Other types of overtime, such as overtime required by state law or a collective bargaining agreement, or overtime paid voluntarily by employers, are not eligible for the tax deduction. The qualified overtime portion can be calculated as the total FLSA hours worked over forty in a workweek, multiplied by one-half, multiplied by the employee’s regular rate of pay.
For the tax year 2025, employers were not required to include qualified overtime pay on year-end tax forms, including Form W-2. Beginning in 2026, these amounts must be included on year-end tax forms for workers to claim the overtime deduction. Generally, these amounts will be reported on Form W-2 in box 12, using code TT. Employers must correct a Form W-2 if they discover an error made in the Form W-2 box for the total overtime calculation.
Employees are instructed to request a Form W-2c from their employers if they believe the employer omitted or understated the amount of qualified overtime compensation on the employee’s Form W-2. The employee is not entitled to a qualified overtime tax deduction that differs from the amount of qualified overtime compensation reported on the employee’s Form W-2.
The FAQs clarify that employers “may not reduce withholding on wages to account for the qualified overtime deduction unless the employee furnishes the employer an updated and valid Form W-4 accounting for the employee’s expected deduction for qualified overtime compensation.”
Independent contractors may only receive qualified overtime if they are considered employees under the FLSA, while still being classified as independent contractors for IRS purposes, a circumstance the IRS deemed “rare.”
Tipped Occupations
In April 2026, the IRS released final regulations to expand the list of specified occupations that “customarily and regularly” receive tips, such as bartenders, waiters, cooks, gambling dealers, musicians, baggage porters, and concierges. The expanded list now includes app/platform delivery people, visual artists, floral designers, gas pump attendants, pet and show animal caretakers, and eyebrow and eyelash technicians.
Employees in those occupations may deduct up to $25,000 per year in tips. This applies to taxable years beginning after December 31, 2024, and before January 1, 2029.
Next Steps
The new FAQs provide helpful guidance for employers and employees to remain compliant with federal tax laws. Looking ahead, employers may wish to stay abreast of any new developments or guidance that could be forthcoming. The U.S. Congress could choose to pass new legislation to extend the provisions for no tax on tips and overtime pay beyond 2028.
Ogletree Deakins’ Employment Tax Practice Group and Hospitality Industry Group will continue to monitor developments and will post updates on the Employment Tax, Hospitality, and Wage and Hour blogs as additional information becomes available.
This article and more information on how the Trump administration’s actions impact employers can be found on Ogletree Deakins’ Administration Resource Hub.
Michael K. Mahoney is a shareholder in Ogletree Deakins’ Morristown office.
Stephen Kenney is an associate in Ogletree Deakins’ Dallas office.
This article was co-authored by Leah J. Shepherd, who is a writer in Ogletree Deakins’ Washington, D.C., office.
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