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OB3...2...1..takeoff and takeaways for 2026 – part 1

The One Big Beautiful Bill Act became law on July 4, 2025, with many of its trickier provisions on transition relief going into effect in 2026. Are you prepared for the tracking, reporting, and compliance challenges you’ll face this year? Now is the time to be sure.

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Webinar highlights

During this webinar, we'll cover:

What your “no tax on overtime/tips” obligations are in 2026 (and why the new Form W-4 is the key);
What new data you should already be collecting and how it will impact your onboarding workflow;
How to prepare yourself and your employees for the launch of Trump Accounts; and
A sneak peek at what your employees need to file for their 2025 personal returns.

Watch part 1 now

Executive summary of OB3...2...1..takeoff and takeaways for 2026 – Part 1

This session provides a detailed breakdown of how the One Big Beautiful Bill Act (OB3 / OBBBA) reshapes overtime taxation, payroll reporting, and employee withholding beginning in 2026. The discussion focuses on the transition from 2025 to full implementation, outlining what constitutes qualified overtime, how employers must track and report it, and how employees must actively adjust withholding to realize the benefit during the year.

The session emphasizes the operational shift required for healthcare employers, where payroll systems, reporting logic, and employee communication must align to ensure compliance and avoid confusion across the workforce.

Understanding “no tax on overtime” and its structure

Under OB3, employees may deduct qualified overtime compensation on their personal tax returns for tax years 2025 through 2028.

Key principles include:

Only federally required overtime under the Fair Labor Standards Act (FLSA) qualifies
Only the premium portion of overtime – the “half” in time‑and‑a‑half – is deductible
The benefit applies only to federal income tax, not Social Security or Medicare taxes
Annual limits apply – up to $12,500 per individual or $25,000 for joint filers, with income‑based phase‑outs

This framework significantly narrows what qualifies, requiring employers to separate FLSA‑compliant overtime from other premium pay categories.

What changes between 2025 and 2026

The distinction between 2025 and 2026 drives most operational changes:

In 2025 – employees received the benefit only when filing their tax returns
Employers were not required to report qualified overtime amounts
Federal withholding remained unchanged during the year

In 2026:

Employers must track and report exact qualified overtime amounts
Employees can reduce withholding during the year by submitting a new Form W‑4
Payroll systems become the primary source of truth for overtime reporting

This transition shifts responsibility from employee‑only tax filing to shared employer‑employee execution.

Defining qualified vs. non‑qualified overtime

A critical compliance requirement is distinguishing eligible overtime from excluded compensation.

Qualified overtime:

Time‑and‑a‑half required under federal FLSA rules
The premium portion only – not total overtime pay
Overtime generated under 8/80 healthcare arrangements (federal basis)

Not qualified:

Straight‑time wages for overtime hours
State‑mandated daily overtime without FLSA applicability
Double time, shift differentials, holiday premiums, and contractual overtime

These distinctions require payroll systems to classify overtime types at a granular level.

How to calculate qualified overtime amounts

Employers must convert total overtime earnings into the qualifying premium portion.

Examples:

For standard time‑and‑a‑half – divide total overtime pay by 3
For double time scenarios – divide total overtime pay by 4
Apply the same logic after calculating any blended rate

Accurate calculation is essential, as employees will compare W‑2 values against their pay history.

New 2026 Form W‑2 reporting requirements

OB3 introduces structural changes to Form W‑2 that directly impact payroll reporting:

Box 12 includes new codes:
- Code TT – qualified overtime compensation
- Code TP – qualified cash tips
Box 14 is split into:
- 14A – traditional informational items
- 14B – Treasury Tipped Occupation Codes (TTOCs)

Employers must report total qualifying amounts without applying income limits or eligibility rules.

No tax on tips – occupation‑based eligibility

OB3 extends similar treatment to qualified tips:

Applies based on employee occupation, not employer industry
Requires alignment with Treasury Tipped Occupation Codes
Includes voluntary tips across cash, card, and qualifying electronic formats

This creates potential applicability even within healthcare environments for certain roles.

The new Form W‑4 and employee withholding responsibility

To receive benefits during the year, employees must actively submit an updated Form W‑4.

Key challenges:

Employees must estimate annual qualified overtime and tips
Only the qualifying premium portion should be included
Over‑estimation may lead to under‑withholding and tax liability
Under‑estimation delays the benefit until tax filing

This introduces a new level of complexity for employees, particularly in variable‑hour healthcare roles.

Employer communication and workforce impact

Without proactive communication, employees may:

Assume payroll errors when W‑2 values differ from paychecks
Miss withholding opportunities due to inaction
Misunderstand eligibility rules for overtime and tips

Recommended actions include:

Educating employees on how qualified overtime is calculated
Providing guidance on when to submit a new W‑4
Setting expectations for W‑2 reporting differences
Coordinating messaging with payroll providers

Clear, consistent communication is critical to avoiding confusion and maintaining trust.

Preparing for 2026 OB3 implementation

Healthcare employers should take immediate steps to prepare:

Confirm payroll systems can track FLSA‑specific overtime premiums
Validate handling of blended rates and 8/80 agreements
Ensure readiness for new W‑2 codes and reporting formats
Develop employee‑facing education materials
Avoid providing individualized tax advice

From legislative change to payroll execution

Part 1 of OB3 moves overtime taxation from a year‑end tax concept to a real‑time payroll and withholding function. Employers must operationalize new definitions, reporting requirements, and communication strategies to ensure compliance while helping employees understand and access the intended benefits.