We previously outlined the substantive features of the One Big Beautiful Bill Act’s “no tax on tips” and “no tax on overtime” deductions. This update concerns implementation: how workers claim the deductions, what employers and other payors were expected to do for 2025 reporting purposes, and what to expect going forward.
The IRS’s March 2, 2026, news release confirms that taxpayers will use 2025 Schedule 1-A (Form 1040) together with the 2025 Form 1040 Instructions to claim the deductions for qualified tips and qualified overtime on 2025 returns. That announcement does not alter the underlying eligibility rules. Its significance is procedural: the IRS has now identified the mechanism through which those deductions can be claimed, giving affected workers and their advisers a concrete path for 2025 return preparation.
The takeaway for employers and other payors is that the IRS did not require separate 2025 information-return reporting for qualified tips or qualified overtime. Notice 2025-62 provided transition penalty relief for 2025. Notice 2025-69 confirms that the 2025 Forms W-2, 1099-NEC, 1099-MISC and 1099-K were not revised to include separate reporting fields for those amounts for that year. 2025 functioned as a transition year: workers may claim the deductions, but employers and other payors were not yet subject to a mandatory reporting regime specific to those deductions.
Employers and other payors will operate under a more formal framework in 2026. IRS Publication 15-T now reflects a 2026 withholding framework tied to updated Form W-4 procedures, and the IRS has indicated that the relevant Forms W-2 and 1099 will be updated for 2026 to provide separate reporting of qualified tips and qualified overtime. 2025 focused primarily on how workers claim the deductions on their returns, while 2026 marks the beginning of a more developed withholding and reporting regime.
Parsons’ employment attorneys are experienced in advising clients on these developments. Please contact us with any questions you may have as you evaluate and prepare for these changes.
