The recently enacted U.S. spending bill introduces significant changes to U.S. tax law, offering new tax credits for qualified employee overtime and tips through the 2028 tax year. While these provisions create valuable benefits for employees, they impose new reporting requirements on employers.

Passport Software, an IRS-approved provider of payroll software and services, is here to guide your business through these changes. Our solutions are designed to ensure your organization remains compliant and accurately manages the necessary data for both the current transition year and future mandates.

The Immediate Challenge for Employers

The Act is effective now, and existing tax withholding remains unchanged—you must continue to withhold taxes on overtime pay and tips exactly as before. The critical difference lies in new reporting mandates: employers must provide supplementary information to employees so individuals can reclaim excess Federal Withholding Tax (FWT) via their annual income tax returns (IRS Form 1040).

This necessitates immediate adjustments to your internal tracking and reporting procedures.

Phased Reporting: 2025 vs. 2026 and Beyond

The employer reporting requirements evolve in two phases, demanding different actions depending on the tax year.

Transition Relief for Tax Year 2025

The IRS recognizes that payroll forms for 2025 lack the new reporting fields. Due to this transition relief, employers should not use Box 12 for qualified overtime or tips this year.

However, employees still need this data to claim their refunds. Employers must provide the qualified overtime and tip totals to employees via one of two methods:

• A separate document.
• Optional inclusion of the information within Box 14 on the paper W-2 form only.

Reporting for Tax Years 2026 and Beyond

Starting with Tax Year 2026 (for filing in 2027), the IRS will mandate the use of new reporting fields in updated forms:

• Revised EFW2 format: The electronic filing format will be updated with new data fields.
• Updated Paper W-2s: Box 14 will be split into Box 14a (current usage) and Box 14b (new Tipped Occupation Codes).
• New Box 12 Codes:
  • Code TT: Qualified Overtime
  • Code TP: Qualified Tips
  • Code TA: Trump Account Contributions
• New Box 14b Tipped Occupation Codes:
  • 100s: Beverage and Food Service (Bartenders, Wait Staff, Chefs and Cooks, Dishwashers)
  • 200s: Entertainment and Events (Gambling Dealers, Dancers, Musicians and Singers, Digital Content Creators)
  • 300s: Hospitality and Guest Services (Baggage Porters and Bellhops, Concierges, Maids, and Housekeeping Cleaners)
  • 400s: Home Services (Home Maintenance and Repair Workers, Home Landscaping and Groundskeeping Workers, Home Electricians, Home Plumbers)
  • 500s: Personal Services (Personal Care and Service Workers, Nannies and Babysitters, Pet Caretakers)
  • 600s: Personal Appearance and Wellness (Skincare Specialists, Massage Therapists, Barbers, Hairdressers, Hairstylists, and Cosmetologists)
  • 700s: Recreation and Instruction (Golf Caddies, Tour Guides, Sports and Recreation Instructors)
  • 800s: Transportation and Delivery (Parking and Valet Attendants, Taxi and Rideshare Drivers and Chauffeurs, Goods Delivery People)

Current Compliance

Passport Software already tracks Qualified Overtime and Tips, and has recently been enhanced to harvest these totals and print them in W-2 Box 14 for 2025.  When the IRS introduces the new forms for 2026, they will go into Box 12.

Navigating the New Tax Credits and Provisions

The Act introduces three primary deduction/refund mechanisms that employers need to understand for accurate tracking:

1. FWT Refund on Qualified Overtime

Individuals receiving qualified overtime pay may deduct the “half” portion of “time-and-a-half” compensation (the amount exceeding their regular rate of pay).

2. FWT Refund on Qualified Tips

Employees in eligible industries who receive voluntary tips are eligible for a refund of FWT withheld on those tips. Service charges and automatic gratuities are excluded.

• Maximum Refund: $25,000 (same limit for single and joint filers).
• MAGI Phase-Out Threshold: Begins at $150,000 (single filers); $300,000 (joint filers).

Note: This refund applies only to Federal Withholding Tax. There is no reduction in liability for Social Security (FICA), Medicare (HI), or state/local taxes.

3. Trump Account Contributions

The Act introduces a retirement account provision for children under 18 with a $5,000 maximum annual contribution limit. While contributions are after-tax, employers may contribute up to $2,500 tax-free to the employee, which counts toward the yearly maximum.

A Note on Employee Record-Keeping

Employers must continue to enforce existing IRS tip reporting regulations. Employees who receive $20 or more in cash tips from a single job in a given month must report the total to their employer by the tenth day of the following month. Employers withhold taxes based on these reported amounts.

Diligent record-keeping by employees is crucial for you to report annual totals accurately, and for them to claim the new FWT refund. Our payroll services team can help manage these complex data inputs efficiently.

Prepare for Compliance with Passport Software

The 2025 spending bill presents both opportunities and compliance hurdles. Ensure your organization is prepared for the transition year and the mandatory electronic filing changes ahead.

Passport Software provides robust, IRS-approved payroll solutions to handle complex tax legislation changes with ease. Contact us today to learn how our software and services can simplify your payroll processing and reporting requirements.