This article is for admins who run payroll, manage benefits, or handle taxes.
The One Big Beautiful Bill (OBBB or OB3) Act is a 2025 law that may change how you run payroll, offer benefits, and report taxes. Some parts of the law help businesses save money. Others add new rules about what to report and when.
This article briefly explains the parts of the OBBB Act that may affect you if you use Gusto. Visit our blog for general OBBB information.
Last updated November 2026
The One Big Beautiful Bill (OBBB or OB3) Act changes how you handle payroll, benefits, and taxes. The law gives tax savings to workers, mainly for tips and overtime pay. Because of this, you must track tips and overtime in more detail.
You must collect new information from employees who earn tips.
You need to track overtime in a way that clearly shows what overtime federal law requires. Because of this, we may ask you for more details when you run payroll with overtime. We need this information to determine whether the overtime meets federal rules.
We update payroll and reporting to meet the new rules.
We include new information on year-end tax forms for your employees and contractors.
We handle most reporting automatically. Depending on your situation, we may ask you for more information so we can report correctly.
What you still must do: Gather accurate tip and overtime information from your workers so we can report it.
Tax credits and benefits: paid leave, childcare, student loans, R&D, HSAs, depreciation, ACA, and data security
From January 1, 2025, through December 31, 2028, eligible workers can deduct up to $25,000 in tips from income tax. This deduction does not apply to Federal Insurance Contributions Act (FICA) taxes.
Make sure employees report all their tips to you, and enter those tips in payroll.
Track voluntary tips separately in payroll throughout the year. Voluntary tips are tips customers choose to pay, not mandatory service fees.
Add a Treasury Tipped Occupation Code (TTOC) for each tipped employee in Gusto. Learn how to add a TTOC.
Before you change any tax information for your employees, make sure your workers qualify for the 2026 tip deduction. Check if your business is a Specified Service Trade or Business (SSTB). If you're an SSTB, your employees do not qualify for the new deduction. If you're unsure, talk to a tax advisor or find a professional through Gusto's Partner Directory.
Tips count as qualified tips only if:
Customers give them voluntarily.
They come with no penalty for not paying.
The customer sets the amount, not your business.
They come from a job on the IRS list of approved tipped occupations.
Mandatory service charges are not tips, so they do not qualify. Enter them as a Distributed Service Charge. Learn how to enter tips and service charges.
Box 12 codes:
TP—Cash tips reported to the employer (for employers not in an SSTB)
TS—Total cash tips reported to the employer (for employers in an SSTB)
Box 14b: Tipped occupation code
Since 2026, employees can enter estimated tips on Form W-4, line 4b. For 2027 paychecks, they can submit a new W-4 with their 2027 estimates. This may lower the federal income tax withheld from each paycheck.
Contractors can deduct up to $25,000 in qualified tips from their gross income for tax years 2025 through 2028. Self-employment taxes still apply to those tips.
For tax year 2026, record contractor tips in Gusto when you pay contractors, and add a Treasury Tipped Occupation Code (TTOC) for each tipped contractor. We report the tips in Box 1b and the TTOC in Box 1c of the contractor's 2026 Form 1099-NEC, as the IRS now requires. Tips you do not record in Gusto will not appear on the form.
Box 1a shows the contractor's total nonemployee compensation, including their tips. On forms for 2025 and earlier, this was Box 1.
When you pay a contractor, enter tips in one of these columns on the Edit payments step.
Tips: Tips you pay the contractor through Gusto. We add this amount to their payment.
Cash tips: Tips the contractor already received directly. Gusto does not pay out this amount.
Each tipped contractor also needs a TTOC. Learn how to add a TTOC for a contractor.
Tips count as qualified tips only if:
Customers give them voluntarily.
They come with no penalty for not paying.
The customer sets the amount, not your business.
They come from a job on the IRS list of approved tipped occupations.
Mandatory service charges are not tips, so they do not qualify. Enter them as a Distributed Service Charge. Learn how to enter tips and service charges.
For tax year 2025 contractor tips, see Tip and overtime reporting for tax year 2025.
As of 2026, we collect occupation codes for all workers who earn tips. These codes apply to jobs where tips are common, including:
Food and beverage: Servers, bartenders, baristas, bussers, chefs, bakers, hosts
Entertainment and events: Dealers, musicians, DJs, comedians, ushers, influencers
Hospitality and guest services: Hotel staff, bellhops, baggage handlers, housekeepers
Home services: Cleaners, gardeners, plumbers, electricians, HVAC, repairers
Personal services: Caregivers, nannies, pet sitters, wedding planners, photographers
Personal appearance and wellness: Hairstylists, barbers, makeup artists, massage therapists, trainers
Recreation and instruction: Caddies, ski instructors, dance teachers, art tutors, tour guides
Transportation and delivery: Taxi/rideshare drivers, delivery drivers, valets, movers
Tips do not qualify for this tax deduction in these excluded occupations:
Health services
Performing arts
Athletics
View the list of all approved tip occupations.
Each tipped employee and contractor needs a valid TTOC. Learn how to add a TTOC for an employee or for a contractor.
Workers can deduct up to $12,500 ($25,000 for joint filers) of qualified overtime pay from their income taxes. This started January 1, 2025, and ends December 31, 2028.
Important: This only applies to overtime that federal law requires. It does not apply to:
Extra pay you choose to give as a bonus or perk
Extra overtime rules that only exist under state law
We track overtime pay and report it on Form W-2 in Box 12, using the new code TT—Total amount of qualified overtime compensation.
Since 2026, employees can enter estimated overtime on Form W-4, line 4b. For 2027 paychecks, they can submit a new W-4 with their 2027 estimates. This may lower the federal income tax withheld from each paycheck.
If you added non-Gusto payrolls for 2026, it depends on whether you entered qualified overtime with those payrolls. If you entered federally qualified overtime when you reported them, we already have it and include it in Box 12, code TT, of each employee’s 2026 W-2. If you did not, enter only the federally qualified overtime from those payrolls in the 2026 W-2 Questionnaire. We add it to Box 12, code TT.
If you have not entered your non-Gusto payrolls yet, do both steps:
Report all non-Gusto payrolls so that yearly earnings are correct.
Enter the federally qualified overtime from those payrolls in the W-2 Questionnaire, so Box 12, code TT, is correct. Skip this step for any overtime you already entered as qualified overtime when you reported the payroll.
If you started using Gusto mid-year or paid overtime not already in Gusto, you can add those amounts through the W-2 Questionnaire we’ll send in mid-December 2026. The linked article explains how to calculate qualified overtime premiums.
Your team may ask how they can get the new tax deductions for tips and overtime. Here's how to answer for tax year 2026.
Tips: You do not need to take any extra steps if your employees reported all tips to you and you entered them in payroll. If those two things are true, their 2026 W-2 will show the correct information in Box 12, code TP.
Overtime:
If you run all overtime through Gusto, your employees do not need to do anything extra. When this is true, their 2026 W-2 will show the required overtime information in Box 12, code TT.
If you paid overtime outside of Gusto and did not enter it as qualified overtime when you reported those payrolls, enter it in the W-2 Questionnaire. You can use the linked article to help calculate the correct overtime premium.
Lowering withholding (2026 and beyond): Starting in 2026, employees can enter estimated tips and overtime on their Form W-4. This may reduce the amount of tax withheld from each paycheck throughout the year.
Contractors can find their tips in Box 1b of their 2026 Form 1099-NEC. Share View and download your 1099-NEC (for contractors) with them.
Tips: The same tip rules apply for employees and contractors. Keep entering tips in payroll and keep each tipped worker’s TTOC up to date in Gusto.
SSTB status: We may need to know whether your business is a Specified Service Trade or Business (SSTB). An SSTB is a type of business that gets special tax treatment from the IRS but also has limits on certain tax deductions. We’re waiting for final IRS guidance and will contact you if we need this. See the SSTB list in the IRS Instructions for Form 8995.
Form W-4: For 2027 paychecks, employees can submit a new Form W-4 with their estimated 2027 tips and overtime.
Starting with tax year 2026, you only need to send Form 1099-NEC to the IRS and give a copy to contractors who earn $2,000 or more (previously $600).
We file 1099s for contractors unless you tell us not to. For tax year 2026, reporting for contractor payments under $2,000 is optional. We'll file these 1099s in January 2027.
To stop a filing for certain contractors, follow the steps in Correct a 1099-NEC or stop a filing.
For tax year 2025 (filed in January 2026), the old rule applied: you needed to file a 1099 for any contractor you paid $600 or more.
Learn more in Distribute 1099-NEC forms to your contractors.
Tax year 2025 forms went out in January 2026. Here's how tips and overtime were reported on them.
The Internal Revenue Service (IRS) required Gusto to use Box 7 on the W-2 to report tips for 2025. We listed all voluntary tips in Box 7 of each employee's W-2.
Employees must confirm they have a Treasury Tipped Occupation Code (TTOC) and report their TTOC to the IRS when they file their 2025 personal tax return.
We reported overtime in Box 14 of the W-2.
If you paid overtime that we did not already track, you could add those amounts through the W-2 Questionnaire we sent in mid-December 2025. This applied if:
You joined Gusto in 2025 but did not separate overtime from regular wages when you entered past payrolls during onboarding.
You ran payrolls outside of Gusto that included overtime. You may have reported the non-Gusto payroll, but could not separate overtime from regular wages.
You used a custom earning type (even if labeled "overtime") for custom overtime calculations.
For tax year 2025:
The tip law took effect mid-year, so companies were not required to track contractor tips for the full year.
We did not collect tip information for contractors.
Tip amounts were not shown separately on contractor 1099-NEC forms.
Companies still needed to give each tipped contractor a written statement of their total tips by February 2, 2026.
Since we did not track contractor tips in 2025, you needed to share tip information with your contractors directly.
For tax year 2025, you needed to do the following.
Ask contractors to share their tip records.
Create a statement or letter for each contractor detailing their total qualified tips. You can use this example email template as a starting point.
Send that information by February 2, 2026.
Provide the Treasury Tipped Occupation Code (TTOC) from the official IRS list.
For tax year 2025, to make sure contractors can claim the new tax deduction, include their tips in their total earnings on their 1099. You can do this by adding a historical payment in Gusto that includes any past payments or tips you have not already entered.
If you did not keep detailed tip records in 2025:
The IRS issued Notice 2025-62, which offers penalty relief for missing or incorrect tip reporting for tax year 2025 only.
Starting in 2026, you must keep clear records of all employee and contractor tips.
The OBBB Act also changes these tax credits, deductions, and benefits.
Paid Family and Medical Leave Tax Credit
Businesses can claim a bigger tax credit for paying employees on leave.
The credit goes up to $600,000 for small businesses.
You must have a written leave policy to qualify.
Started: January 1, 2026
Childcare and Dependent Care Tax Credit
Raises the limit for Dependent Care FSAs
Increases tax credit for offering childcare benefits
Started: January 1, 2026
Student loan help (employer tax-free benefit)
You can keep offering up to $5,250/year to help employees pay student loan principal or interest tax-free.
Started: January 1, 2026
Research and Development (R&D) tax credit rules
You can now deduct 100% of domestic R&D expenses right away.
You still need to deduct foreign R&D expenses over time.
Started: January 1, 2025
Health Savings Account (HSA) expansion
More health plans now qualify for HSA use.
We'll support this in our benefits tools.
Started: January 1, 2026
Depreciation and interest deductions (Section 179 & 163(j))
Increases deduction limits for equipment purchases
Improves interest deductions on loans
Started: January 1, 2025
Affordable Care Act (ACA)/Medicaid eligibility changes
Stricter rules for who qualifies for ACA health benefits
Some workers may lose eligibility.
Starts: January 1, 2027
Data security and AI rules
New federal rules to improve cybersecurity and prevent fraud
Businesses must protect sensitive data.
Take effect immediately and may change with agency updates
Here's how to make sure you do not miss anything on the OBBB Act:
Stay updated: We'll update our blog as the IRS releases new guidance.
Be ready for changes: Expect updates to W-2s, 1099s, onboarding forms, and payroll tax flows.
Report overtime paid outside Gusto: If you paid overtime outside of Gusto and did not enter it as qualified overtime when you reported those payrolls, enter it in the W-2 Questionnaire. Use the linked article as a guide to calculate qualified overtime premiums.
Share information with your team: Share any support materials we send you:
Share View, print, or download your W-2 (for employees) with employees so they know where to find tip and overtime info.
Share View and download your 1099-NEC (for contractors) with contractors about tip reporting.
Watch your inbox and Home page to-dos: We'll contact you by email or through Gusto when you need to take action. The IRS has not released all final guidance yet, so check this article and our blog for updates.
Disclaimer:
This summary is based on current information. Laws may change and we’ll update our blog and other related resources accordingly. For specific tax advice, speak with your tax professional.