Trump’s ‘no tax on tips’ brings new W-2 era
Summary
The One Big Beautiful Bill Act included a “no tax on tips” provision that lets eligible workers deduct up to $25,000 in qualified tips from federal income for tax years 2025–2028. While aimed at giving tipped workers relief, the change creates a significant reporting shift for employers and payroll teams: more granular tip data will be required, and payroll systems must start tracking both cash and third-party/credit-card tips more precisely.
The IRS designated 2025 a transition year, leaving W-2 forms unchanged for now and offering temporary penalty and transition relief while it issues final rules. New W-2 fields and Box 12 codes identifying tip-eligible employees and total qualified tips/overtime are expected for 2026. Tax pros and payroll managers are being urged to document their tip-collection methods carefully during this rollout.
Key Points
- The OBBBA tip provision allows eligible workers a federal deduction of up to $25,000 in qualified tips for 2025–2028.
- 2025 is a transition year: the IRS kept W-2 forms unchanged for 2025 to avoid disruptions and gave temporary penalty relief.
- Employers must collect and verify both cash tips and tips paid through third-party systems; card-based tips are easier to track than cash.
- Payroll systems and managers face an operational burden to record far more granular tip data than before.
- New W-2 fields are expected in 2026, including a category for approved tip occupations and two Box 12 codes for total qualified tips and qualified overtime compensation.
- Tax professionals advise employers to ‘document, document, document’ — keep clear records of collection methods and payroll-provider guidance during the transition.
Context and relevance
This is one of the most notable payroll-reporting changes in years and will particularly affect restaurants, bars, hotels, salons, delivery services and other tip-heavy sectors. The shift reflects broader trends: more gratuities are moving to electronic payments (easier to verify) and lawmakers are trying to clean up a historically messy area of tax reporting.
For HR, payroll and finance teams, the change intersects with compliance, payroll software capabilities and employee communication. Employers should review their point-of-sale and payroll integrations, update policies for tip reporting, and plan for system changes ahead of the expected 2026 W-2 format updates.
Why should I read this?
Short version: if you run payroll, manage staff in tipped roles or handle compliance, this affects you. It’s not just a tax perk for employees — it forces employers to tighten how tips are recorded and reported. Read this so you don’t get caught off guard and can start documenting your approach now.
Source
Source: HR Dive — Trump’s ‘no tax on tips’ brings new W-2 era