This article is for admins who run payroll, manage benefits, or handle taxes.
The One Big Beautiful Bill (OBBB or OB3) Act is a new 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.
Here are key changes from the One Big Beautiful Bill Act that may affect your business.
Last updated November 28, 2025
No tax on tips
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 Income Contribution Act (FICA) taxes.
For tax year 2025:
For employees: The Internal Revenue Service (IRS) requires Gusto to use Box 7 on the W-2 to report tips for 2025.
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.
For contractors: We do not collect tip information for contractors.
You must follow the 2025 tip-reporting rules explained in this article. Contractors must confirm they have a TTOC and report the code to the IRS when they file their 2025 personal tax return.
For tax year 2026:
For employees: 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.
We'll ask you to confirm whether you're an SSTB in 2026 so we can report tips correctly on W-2s.
Make sure the tips qualify. 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 Treasury's list of approved tipped occupations.
What employees can do: Enter their estimated 2026 tips on Form W-4, line 4b. This reduces their payroll taxes on each paycheck.
What you should track: Track voluntary tips separately in payroll throughout the year. We'll contact you to collect employee occupation codes for tipped roles.
For contractors: We do not collect tip information for contractors.
If your contractors receive voluntary tips, track these tips throughout the year.
At year-end, we'll ask you to provide:
The total amount of voluntary tips each contractor received
Each contractor's occupation code
This information will appear on their Form 1099-NEC.
Follow the tip-reporting rules explained in this article.
Report tips on tax forms:
For W-2 employees:
Box 14b: Tipped occupation code
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)
For 1099 contractors:
Box 1b: Cash tips
Box 1c: Occupation codes
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
No tax on overtime
Workers can deduct up to $12,500 ($25,000 for joint filers) of overtime pay from their income taxes.
We'll track and report overtime pay:
For tax year 2025:
We'll report overtime in Box 14 of the W-2.
If you paid overtime that we did not already track, you can add those amounts through the W-2 Questionnaire we sent in mid-December 2025. This may apply 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 2026:
Employees can add their estimated 2026 overtime wages on Form W-4, line 4b, as a deduction against their 2026 payroll taxes.
We report overtime on Form W-2 under a new Box 12 code: TT—Total amount of qualified overtime compensation.
Only applies to overtime required under federal law (not extra pay from employer generosity or state law)
Started: January 1, 2025. Ends: December 31, 2028.
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 interest tax-free.
Started: January 1, 2026
Higher 1099 reporting limits
You only need to send 1099s to the IRS and give copies 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.
Important: For tax year 2025, you must still file 1099s in January 2026 for any contractor you paid $600 or more.
Learn more in the article's FAQs section on Distributing 1099s.
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: You must enter any overtime paid outside of Gusto 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 this article with employees so they know where to find tip and overtime info for 2025.
Share this article with contractors about 2025 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.
Q: What is the One Big Beautiful Bill Act, and how does it affect my business?
A: The One Big Beautiful Bill (OBBB or OB3) Act is a new law that 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 start tracking tips and overtime in more detail.
What this means for you:
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.
What Gusto will do:
We'll update payroll and reporting to meet the new rules.
We'll include new information on year-end tax forms for your employees.
What you still must do: You still need to gather accurate tip and overtime information from your workers so we can report it.
Q: How do the new tip tax rules work, and what do I need to do?
A: The law changes how the IRS taxes tips and how you must report them.
As of January 1, 2025: Employees can deduct up to $25,000 in tips from their income taxes.
Your responsibility:
Track voluntary tips separately in payroll. "Voluntary tips" are tips that customers choose to pay, not mandatory service fees.
Make sure employees report all their tips to you. Enter those tips in payroll.
How we'll report tips:
For employees
For tax year 2025 (W-2s sent in January 2026), we'll list all voluntary tips in Box 7 of each employee's W-2.
For 2026, we'll collect each tipped employee's occupation code. You may need to give us each worker's occupation so we can report tips correctly. You also need to tell us if your business is a Specified Service Trade or Business (SSTB). Use the SSTB list on IRS Form 8895.
For contractors
If your contractors receive tips, you must track those tips yourself. You should have given each tipped contractor a written statement of their total tips by February 2, 2026.
Q: What are the new overtime tax rules, and how will Gusto handle them?
A: The law also changes how overtime pay is taxed and reported. Employees can now deduct some overtime pay from their income taxes.
They can deduct up to $12,500 in overtime wages. If they're married filing jointly, they can deduct up to $25,000.
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
How we handle overtime:
For tax year 2025: We track overtime pay and report it in Box 14 of each employee's Form W-2.
For 2026: Employees can include their estimated 2026 overtime amounts on Form W-4. This may lower taxes during the year instead of at tax time.
Q: I already added non-Gusto payrolls. Will adding overtime premiums increase my employees' 2025 earnings?
A: No. Those payroll entries never asked for overtime breakdowns, so we do not know how much overtime was included. The overtime premium you enter in the W-2 questionnaire only updates Box 14 on the W-2. It does not increase any other earnings.
Q: If I have not entered my non-Gusto payrolls yet, do I need to do both steps?
A: Yes. You must:
Report all non-Gusto payrolls so that yearly earnings are correct.
Enter overtime premiums in the W-2 Questionnaire, so Box 14 is correct.
Q: What information will my employees ask me about these tax changes?
A: Your team may ask how they can get these new tax deductions for tips and overtime.
How to answer for tax year 2025:
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 2025 W-2 will show the correct information in Box 7.
Overtime:
If you run all overtime through Gusto, your employees do not need to do anything extra. When this is true, their 2025 W-2 will show the required overtime information in Box 14.
If you paid any overtime outside of Gusto, you must enter that overtime in the W-2 Questionnaire. You can use the linked article to help calculate the correct overtime premium.
How to answer for tax year 2026 and beyond: 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.
Q: How do the new 1099 reporting rules affect my contractors?
A: The law also changes when you must send Form 1099 to a contractor. For tax year 2026, you only need to send a Form 1099 to a contractor who earned $2,000 or more from you.
Before that change takes effect:
For 2025 earnings (filed in January 2026), the old rule still applies. You still need to file a 1099 for any contractor paid $600 or more in 2025.
How we support you: We continue to generate and file 1099s for your contractors for 2025 unless you tell us not to.
Important: If a contractor received tips in 2025, you must track those tips separately outside of Gusto. You should have given that contractor a written statement by January 31, 2026, with the total voluntary tips they received.
Q: What do I need to prepare for year-end, and what should I expect from Gusto?
A: You may need to collect information before year-end so employee tax forms are correct. This explains what to review and what we may ask you for.
We'll update our system to automatically handle most reporting. However, depending on your situation, we may ask you for more information so we can report correctly.
Please review the following:
Tip information
Make sure you're tracking each employee's voluntary tips inside Gusto payroll. You should have started doing this by December 31, 2025.
If your contractors receive tips, you must track those tips yourself. You should have given each tipped contractor a written statement of their total voluntary tips by February 2, 2026.
Overtime information
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 sent in mid-December 2025. Learn how to calculate overtime wages in the linked article.
Business type information (SSTB status)
For tax year 2026: We may need to know whether you're 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 guidance from the IRS about how we must collect this information.
Ongoing updates
The IRS has not released all final rules yet. The IRS may change these instructions based on that guidance. Watch your email for updates from Gusto.
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.