Since the enactment of H.R. 1, the One Big Beautiful Bill Act, the Internal Revenue Service has announced that it will not be updating 2025 tax forms such as the W-2 and 1099s to reflect OBBBA changes impacting 2025 tax returns.
Instead, it intends to provide guidance on how to implement the OBBBA with the existing forms. 2025 guidance is needed on how to reflect tips that qualify for the tip deduction on the 2025 tax return. Guidance is also needed on how to reflect qualifying overtime to qualify for the overtime deduction. These may require alteration of payroll practices. Guidance may also be needed on Trump Accounts and the possibility that employers may want to make contributions to the accounts of employees' children.
The IRS has released the
Schedule 1-A
A new draft Schedule 1-A is to be utilized in the calculation of each of the four new below-the-line deductions on the schedule. Part I of draft Schedule 1-A is for insertion of modified adjusted gross income, which will be utilized in calculating the impact of the phase-outs of the deductions.
Tip deduction
Part II of the schedule is for the calculation of the qualified tip income deduction. Qualified tip income for an employee is to be reported on Form W-2, Box 7, only if income reported on Form W-2 Box 5 is $176,000 or less. Qualified tips may also be reported on Form 4137, Line 1(c) for Social Security and Medicare tax on unreported tip income.
It does not appear that draft Form 4137 has yet been updated to reflect this information on Line 1(c). The IRS has issued a list of 68 occupations, with occupation codes, that may have qualifying tip income, while also indicating that the list may be further modified.
Schedule 1-A instructions, which have not yet been issued as of this writing, are to address situations with more than one employer. Another line is to include qualified tips from a trade or business, which are to be reported on Form 1099-NEC, Box 1, Form 1099-MISC, Box 3, or Form 1099-K. The qualified tips may not exceed the net profit from the trade or business, and instructions are to address situations with more than one trade or business.
The total of these sums is then to be compared to the $25,000 limit on deductible qualified tips. MAGI is then compared to the phase-out range of $150,000 ($300,000 for joint filers) for the final deduction calculation.
The proposed regulations on the tip income deduction include a discussion of what constitutes tips paid in cash or cash equivalents; that the tips must be received from customers or through a mandatory or voluntary tips sharing arrangement; that the tips must be voluntary and not subject to negotiation; and may not be a service charge unless there is an option to modify or disregard the charge.
The regulations also discuss categories of workers not eligible for the tip deduction, including specialized services trades or businesses, where the business depends primarily on the reputation of its owners or employees, performing artists, and athletes. It also excludes illegal activity, prostitution, and pornographic activity, although working for a business that violates the law in some other respects may not be disqualifying.
Guidance is still to be forthcoming for 2025 where tip and non-tip income are not stated separately. Employers and their payroll administrators will want to start looking at segregating qualifying tips from other tips. Consideration might be given to removing any fixed service charges that will not qualify for the tip deduction. Note should also be taken of which occupation codes qualify for the deduction.
Overtime
Part III of Schedule 1-A addresses overtime. Qualified overtime compensation is to be inserted from Form W-2, Box 1, Form 1099-NEC, Box 1, or Form 1099-MISC, box 3.
The instructions to be issued will clarify how to handle situations where the required information does not appear on those forms for 2025 and how to determine what constitutes qualified overtime. These sums are then compared to the deduction limit of $12,500 ($25,000 for joint filers). Then MAGI is compared to the phase-out range of $150,000 ($300,000 for joint filers), with the calculation resulting in the qualified overtime deduction.
Employers should take steps to try to identify and segregate qualifying overtime from non-qualifying overtime. Overtime is more likely to qualify if it is being paid in accordance with Fair Labor Standards requirements.
Car loan interest
Part IV of Schedule 1-A addresses the new car loan interest deduction. Schedule 1-A refers to the instructions for determining qualified passenger vehicle loan interest, with interest on not only Schedule 1-A but also Schedules C, E or F. Those interest amounts are to be supported by third-party reporting by the lender.
Vehicle identification numbers for up to two vehicles can be listed on the schedule, with the instructions to address more than two vehicles. The total interest is then compared to the $10,000 deduction limit. Next, MAGI is compared to the phase-out limit of $100,000 ($200,000 for joint filers) for calculation of the final deduction.
This deduction is less likely to impact payroll. Care should be taken to make sure that the new vehicle qualifies for the deduction, such as a VIN beginning with 1, 4 or 5 indicating assembly in the U.S. Commercial vehicles do not qualify for the deduction — it must be for personal use.
The Senior Deduction
Part V of Schedule 1-A addresses the $6,000 senior deduction, which also does not have payroll impact. The senior deduction is only available if the taxpayer and spouse have valid Social Security numbers and, if married, a joint return is filed. MAGI is compared to the phase-out limits of $75,000 ($150,000 for joint filers). The amount by which MAGI exceeds the phase-out amount, if any, is multiplied by 6%, and that amount is subtracted from the $6,000 limit. This sum is then included as a below-the-line deduction if the taxpayer has a valid Social Security number and was born before Jan. 2, 1961. It is also included again if the spouse has a valid Social Security number and was born before Jan. 2, 1961.
Part VI of Schedule 1-A then adds the totals from the four deductions, which is then entered on Form 1040, line 13b or 1040NR line 13c.
Trump Accounts
Employers should also anticipate possible involvement with the set up of Trump Accounts. The accounts are available to children born starting in 2025; however, due to administrative issues, the accounts cannot be set up until Jan. 1, 2026.
Of the $5,000 in annual funding of the accounts, up to $2,500 may come from employers. Another $1,000 in seed money will come from the federal government. Employers will need to decide if they want to participate in funding Trump Accounts and set up the payroll procedures to do so by the end of 2025.
2026 Draft Form W-2
While the IRS has announced that they will not update the 2025 Form W-2, the agency has issued a draft 2026 Form W-2. Box 14 is divided into Box 14a and 14b. Box 14a is to be used for various items such as state disability insurance taxes withholding, union dues, uniform payments, health insurance premiums deducted, non-taxable income, or educational assistance payments. Box 14b is to be used for reporting the taxpayer's tip occupation code. Box 12 has several new codes: TA for employer contributions to Trump Accounts, TP for qualified tips, and TT for qualified overtime compensation.
Additional IRS guidance will direct employers as to how to report these items on the 2025 Form W-2.
Summary
Employers, payroll administrators, and self-employed persons should begin to take steps to identify qualifying tips and overtime and to be able to supply the information to the IRS necessary to support tip and overtime deductions and any employer contributions to Trump Accounts.
At this point in time, we still await further guidance on these below-the-line deductions and guidance on qualified tip and overtime reporting. Hopefully, some of this additional guidance will be forthcoming in the near future.
