.jpg)
The One Big Beautiful Bill Act changes who qualifies for tax breaks on tips and overtime.
For multi-unit restaurant operators, this primarily comes down to how pay is classified in payroll. When tips, service charges, or overtime are set up differently across locations, employees may miss out on tax benefits they are eligible for, even when operators are paying correctly.
This guide breaks down the differences between service charges and tips under OBBBA, explains the new Form W-2 reporting fields, and walks restaurant operators through the steps they can take to ensure employees receive the full compensation benefits they are entitled to before year-end.
What is the One Big Beautiful Bill Act?
The One Big Beautiful Bill Act (OBBBA) introduces new payroll reporting requirements for employers related to qualified tips and overtime pay. Signed into law in 2025, this legislation creates federal income tax deductions for employees on tip income and overtime compensation, while adding new tracking and Form W-2 reporting obligations for employers.
Here's the key point for restaurant operators: your standard payroll tax obligations haven't changed. You still withhold Social Security and Medicare taxes on tips and overtime, just like before. What's different is that employees can now deduct qualifying amounts from their taxable income when they file their returns. And to make that work, you'll have new fields to complete on Form W-2.
What qualifies as a tip under OBBBA
Not every customer payment counts as a "qualified tip" under OBBBA. The IRS applies specific criteria, and if a payment doesn't meet all of them, it won't qualify for the employee deduction.
The tip must be voluntary: the customer chooses whether to leave a tip.
The customer must set the tip amount: any suggested tip amounts or percentages are option, and the customer may choose to not leave a tip. No require percentage auto-gratuity, or fixed service charge applies.
The employee must work in a traditionally tipped role: a position that normally receives tips, such as a server, bartender, or valet.
That third requirement matters more than you might think. A cashier who occasionally receives tips may not qualify if the position isn't traditionally tipped. The IRS will publish a complete list of eligible occupations.
Service charges vs tips and why it matters for restaurant payroll
This distinction trips up a lot of restaurant operators. The difference between a service charge and a tip isn't just about what you call it on the receipt. It determines whether your employees can claim the OBBBA deduction and how you report the income.
| Factor | Tips | Service Charges |
| Customer discretion | Voluntary | Mandatory |
| Tax classification | Tip income | Regular wages |
| OBBBA deduction eligible | Yes | No |
| Form W-2 reporting | New qualified tip field | Standard wage reporting |
How service charges are classified
Automatic gratuities, banquet fees, and mandatory percentages added to checks are classified as wages under IRS rules, not tips. Even if you print "gratuity" on the receipt, if the customer has no choice in the matter, it's a service charge.
Service charge income flows through your payroll as regular wages, subject to standard withholding. Your employees cannot claim the OBBBA tip deduction on any of it.
How cash and credit card tips are classified
Both cash tips and credit card tips qualify under OBBBA, provided the customer gave them voluntarily. The difference is in tracking: credit card tips are automatically recorded in your POS records, while cash tips depend on employee reporting.
Employees are required to report cash tips to their employer, typically using Form 4070 or a similar system you provide. Accurate tip reporting has always mattered, but under OBBBA it directly affects the deduction employees can claim, so expect more questions from your team about how to report correctly, especially given that over 15,000 employers underreported $6.3 billion in tip income.
Payroll reporting differences between service charges and tips
Service charges are reported as regular wages on Form W-2, same as always. Qualified tips, on the other hand, now require separate tracking and reporting in designated fields.
If your payroll system currently lumps service charges and tips together, you'll want to separate them before year-end reporting. Otherwise, your employees may have trouble claiming their deductions, and you could face questions from the IRS about your Form W-2 accuracy.
How the no tax on overtime provision works
OBBBA also allows employees to deduct overtime compensation from their federal taxable income. However, only overtime required under Section 7 of the Fair Labor Standards Act qualifies, not all overtime pay.Under federal law, overtime is only required when a non-exempt employee works more than 40 hours in a single workweek. That overtime must be paid at 1.5 times the employee’s regular rate, and this is the only overtime that qualifies for the deduction.
Some employers also pay 1.5x for other reasons, such as working holidays, weekends, or long shifts. Even though the pay rate is the same, this type of premium pay is voluntary, not legally required. Because of that, it does not qualify for the OBBBA overtime deduction unless the employee also worked more than 40 hours that week.
How to report tips and overtime on Form W-2
OBBBA adds new Form W-2 reporting requirements starting with tax year 2026. Employers must separately report qualified tips and FLSA-required overtime so employees can claim their deductions.
Reporting qualified tips
The 2026 Form W-2 includes new fields for qualified tip income and the employee’s eligible occupation. Payroll systems must capture tip amounts separately from service charges and regular wages.
Reporting qualifying overtime
A separate field is used to report FLSA-required overtime. This requires tracking overtime by type, not just total overtime hours, to distinguish qualifying overtime from other premium pay.
Required documentation
Employers should retain employee tip reports, POS records showing charged tips, and time records that identify FLSA overtime. These records support Form W-2 accuracy if questions arise.
Note: The IRS is providing penalty relief for 2025 reporting. Even so, employers should track qualified tips and overtime in 2025 so employees can claim deductions when they file their returns.
OBBBA payroll requirement effective dates and sunset provisions
These provisions are temporary, which affects how you plan system updates and set employee expectations.
- Tip deduction: Effective for tax years 2025 through 2028
- Overtime deduction: Effective for tax years 2025 through 2028
- New Form W-2 reporting: Required starting with 2026 forms
Action steps for restaurant payroll compliance
1. Audit current tip and overtime tracking processes
Review how tips are currently recorded in your POS and payroll systems. Can you distinguish between tips and service charges? Is overtime tracked by FLSA classification? Identifying gaps now gives you time to fix them before year-end reporting.
2. Update payroll systems for new reporting fields
Contact your payroll provider to confirm they'll support the new Form W-2 fields. If you're using older software, you may need upgrades or workarounds to capture qualified tips and overtime separately.
3. Train managers on OBBBA compliance requirements
Front-line managers are often the first to hear questions from employees about tips and overtime. A quick training session on the difference between tips and service charges, and why accurate tip reporting matters, prevents confusion later.
4. Establish documentation and audit protocols
Create processes for maintaining tip records and overtime logs. Daily tip reports, POS records, and time-tracking data all support your Form W-2 reporting if questions arise during an audit.
How multi-location restaurants can simplify OBBBA compliance
Tracking tips, overtime, and generating compliant reporting across multiple locations creates a real administrative burden. Each location may handle tips differently, use different POS systems, or have varying overtime patterns. Without a centralized view, you're chasing spreadsheets and hoping nothing falls through the cracks.
Centralized systems reduce compliance risk by standardizing how labor and payroll data flows from each location into a single source of truth. Platforms like Forte consolidate labor tracking, payroll data, and compliance workflows into one platform — while also generating standardized labor reports with the required details that can be stored long-term for audits and ongoing compliance.
Request a demo to see how Forte simplifies OBBBA compliance across your restaurant group.
.jpg)
.png)
SHARE