Operations

2025 tax season and OBBBA: What QSR operators need to know

Quick-service restaurant (QSR) operators must immediately update payroll systems and job classifications to handle the complex tracking and reporting requirements of the 2025 One Big Beautiful Bill Act (OBBBA), ensuring employees can accurately claim new federal tax deductions on qualified tips and overtime premiums.

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March 13, 2026 by Tim Watt — Partner, Bennett Thrasher

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When the One Big Beautiful Bill Act (OBBBA) was signed into law in 2025, much of the public attention focused on two phrases: "no tax on tips" and "no tax on overtime." For QSR operators, however, the reality is much more nuanced.

While these provisions benefit employees, the responsibility for tracking, reporting, and supporting deductions falls largely on employers. As the 2025 tax season begins – and with stricter reporting requirements beginning in 2026 — QSR operators who manage tipped staff, overtime-heavy schedules, high turnover and complex multi-state payrolls must understand the operational implications to comply, substantiate employees' deductions, and prevent costly errors down the line.

1. The big picture: tips and overtime in practice

The OBBBA introduces two key deductions: one for qualified overtime pay and one for qualified tip income. While these deductions are claimed by employees, operators need to make sure payroll systems capture the correct data, provide supporting documentation, and be ready for expanded W-2 reporting starting in 2026. Preparing now will help prevent last-minute scrambling and ensure employees can take full advantage of the deductions.

2. Overtime: What actually qualifies

Despite the headlines, the OBBBA does not remove federal tax on all overtime wages. Employees may deduct only the overtime premium portion, which is the additional half-time pay above their regular rate required under Section 7 of the federal Fair Labor Standards Act (FLSA). Deduction limits are capped at $12,500 for single filers and $25,000 for married taxpayers filing jointly, and they begin to phase out once modified adjusted gross income (MAGI) exceeds $150,000 ($300,000 for joint filers). FICA and Medicare taxes still apply.

Qualified overtime compensation is limited to the premium required under the FLSA. If overtime pay exceeds FLSA requirements due to state law, company policy or contract, only the FLSA-required portion qualifies. For operators in states with stricter overtime rules, payroll systems must clearly separate the FLSA premium from any additional overtime amounts to ensure proper reporting.

3. 2025 tax season: A window to prepare for 2026

The IRS recognizes that employers cannot overhaul payroll systems all at once, so it is offering temporary flexibility for the 2025 tax season. W-2 forms do not require separate reporting of qualified overtime, and employers will not face penalties. Additionally, employees may use reasonable estimates if breakdowns are unavailable. This transition period gives operators a chance to test new payroll systems, review processes and prepare for stricter reporting requirements beginning in 2026.

4. Managing tips in practice

Tracking and reporting tips properly is just as important as managing overtime. Employees in qualifying tipped roles can claim deductions, but operators must ensure all qualified tips — including cash, credit card and pooled tips — are accurately tracked to support employee deductions.

Not all payments qualify, which is why clear payroll procedures and staff training are essential to support accurate reporting. Mandatory service charges are treated as wages, not tips, and therefore do not qualify for the deduction. Non-cash benefits and amounts tied to ownership interests are also excluded. Similar to overtime, the deduction is subject to income phase-outs beginning at $150,000 for single filers ($300,000 for married taxpayers filing jointly).

5. Occupation classification is critical

Determining which employee roles qualify for tip deductions is another critical step. The Treasury has proposed nearly 70 eligible occupations, including servers, bartenders, bussers, hosts and back-of-house staff who participate in tip pools.

Misclassifying roles can result in disallowed deductions, reporting errors and increased audit risk. Operators should review job titles, duties, tip pooling practices and payroll classifications to ensure alignment with Treasury guidance. This step will help avoid penalties and make reporting smoother moving forward.

6. Reporting and state considerations

For tax year 2025, employers are not required to separately report qualified tip or overtime amounts on Forms W-2 or 1099, as the IRS is providing transition relief and will not impose penalties for missing breakout data.

State tax laws may not conform to the federal deductions, meaning employees could still owe state income tax on amounts deducted under federal law. Employees must also meet income phase-out thresholds, filing status requirements and valid Social Security number rules to claim the deductions. That's why clear employee communication during this time is essential.

Preparation and final thoughts

The OBBBA represents a major operational shift for QSR operators. Because these new deductions are currently scheduled to apply only for a limited window (tax years 2025 through 2028), operators should treat implementation as both an immediate compliance priority and a strategic planning opportunity.

Planning now — including upgrading systems, reviewing tip classifications, and coordinating with payroll vendors — reduces audit exposure, avoids penalties, and ensures employees can fully benefit from the new deductions. Treat the 2025 tax season as a chance to strengthen internal controls and align operations with upcoming reporting standards.

Partnering with an accounting firm that specializes in restaurant tax can help your team navigate complex payroll, tip reporting, and classification rules, minimizing last-minute compliance scrambles and ensuring employees take full advantage of the new deductions.

About Tim Watt

Tim Watt is a Tax Partner at Bennett Thrasher, Georgia's largest independent accounting firm. He focuses primarily on complex tax consulting, technical partnership issues, structuring and tax accounting methods for U.S. restaurant and hospitality industries, supporting and advising restaurant owners, franchise operators and franchisors at household-name QSR brands.

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