The "One Big Beautiful Bill Act" (OBBBA): What W-2 Employees Need to Know for 2026

The tax landscape is shifting in a major way for American workers. The One Big Beautiful Bill Act (OBBBA), signed into law in mid-2025, introduces significant changes that will directly impact your take-home pay and tax filings starting in the 2026 tax year. For W-2 employees, particularly those who work hourly or in tipped professions, understanding these new provisions is key to maximizing your financial well-being.

A Game-Changer for Your Paycheck: Overtime and Tips

Two of the most talked-about provisions in the OBBBA are designed to put more money back into the pockets of hardworking Americans.

• No Federal Income Tax on Qualified Overtime: Starting in 2026, the OBBBA allows eligible non-exempt employees under the Fair Labor Standards Act (FLSA) to take a federal income tax deduction for "qualified overtime compensation." This applies to the "premium" portion of your overtime pay the "half" in "time-and-a-half." For example, if your regular rate is $20/hour and your overtime rate is $30/hour, the $10/hour premium is eligible for this deduction.

  • The Fine Print: There is an annual deduction cap of $12,500 for single filers and $25,000 for married couples filing jointly. Additionally, the deduction begins to phase out for individuals with a modified adjusted gross income (MAGI) over $150,000 ($300,000 for joint filers). It's important to note that this deduction applies to federal income tax only; Social Security, Medicare, and state taxes will still apply to your full overtime earnings.

• Relief for Tipped Workers: Similar to the overtime provision, the OBBBA introduces a federal income tax deduction for "qualified tips" for employees in eligible occupations.

  • The Fine Print: This deduction is capped at $25,000 annually per taxpayer and follows the same income phase-out rules as the overtime deduction (starting at $150,000 MAGI for single filers). Like overtime, this applies to federal income tax, not FICA or state taxes.

What This Means for Your W-2

Come tax season 2027 (filing for the 2026 tax year), your Form W-2 will look a little different. The IRS has released draft versions of the 2026 W-2 that include new codes in Box 12 to report these amounts:

• Code TT: Qualified overtime compensation

• Code TP: Qualified tips

Your employer is responsible for tracking and reporting these figures correctly. It's a good idea to keep your own records of your overtime hours and tip income throughout the year to ensure accuracy when you receive your W-2.

A Note for Small Business Owners

While these changes are employee-focused, small business owners have a critical role to play. Your payroll systems must be updated to accurately track and report qualified overtime and tips on the new 2026 W-2 forms. Failure to do so could lead to compliance issues. Additionally, the OBBBA includes provisions relevant to your business, such as the restoration of immediate expensing for domestic R&D expenditures and the implementation of 100% bonus depreciation for qualifying property placed in service after January 19, 2025. Staying informed on both employee and employer-facing changes is vital.

The OBBBA brings new opportunities for W-2 employees to keep more of their hard-earned money, but it also introduces new complexities to tax filing.

At Interval Books, we are fully up-to-speed on all aspects of this legislation. Whether you're an employee with questions about your new W-2 or a small business owner needing to update your payroll compliance, our team is ready to guide you through the 2026 tax landscape with confidence and clarity.

Sources:

• IRS News Release: Treasury, IRS provide guidance for individuals who received tips or overtime during tax year 2025

• IRS Notice 2025-69: Guidance for Individual Taxpayers who received Qualified Tips or Qualified Overtime Compensation

• Ogletree Deakins: It’s Official—No Tax on Tips, No Tax on Overtime Through 2028

• Cherry Bekaert: 2026 Employer Wage Reporting Obligations After OBBBA

• Fidelity Investments: What is ‘No Tax on Tips’ and how does it work?

• Adams Brown: 2026 Payroll Changes: New Rules on Reporting Overtime & Tip Income

• Comerica: Bonus depreciation under the One Big Beautiful Bill