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. The deduction begins to phase out for individuals with a modified adjusted gross income (MAGI) over $150,000 ($300,000 for joint filers). This deduction applies to federal income tax only; Social Security, Medicare, and state taxes 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. The OBBBA also 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.