OBBBA Overtime Deduction and Tip Reporting Changes
January 6, 2026
Starting in 2026, employers will need to separately track and report “qualified” overtime and tips under the OBBBA rules. For overtime, only the FLSA-required overtime premium is eligible for the employee credit/deduction. So if an employer pays overtime premiums for non-FLSA overtime hours, those amounts must be reported separately because they are not qualified. For tips, only voluntary tips paid by customers qualify; any mandatory service charges or automatic gratuities are treated as wages and must also be reported separately since they are unqualified.
Notes on your 2025 W-2 (Box 14 Codes)
- Alabama Exempt Overtime (Code: “EX OT WAGES”)
This reflects the amount of overtime wages earned in 2025 that qualified for the Alabama Overtime Exemption (which ended 6/30/2025). This amount is only exempt from Alabama state income tax. - Federal Qualified Overtime Deduction (Code: “FLSA OT Prem”)
This reflects the amount of overtime wages earned in 2025 that may qualify under the Federal Qualified Overtime Deduction provision included in the “One Big Beautiful Bill Act” passed in the summer of 2025. This is not an exception. It is an informative amount to help support the deduction. Employees should consult their tax preparer with any questions.
These distinctions affect payroll processing, employee communications, and year-end reporting, making early planning essential to avoid compliance issues, rework, or employee confusion once the new requirements take effect.
Read more about the IRS statement here.
For a list of the Treasury Tipped Occupation Codes, see here.