No Tax on Tips & Overtime: 2026 Employer Guide — What Nebraska Employers Must Know

Whether you run a restaurant in Nebraska, manage a hotel, operate a construction crew, or employ any hourly workforce, your tipped and overtime-eligible employees are counting on you for the documentation they need to claim these deductions. Here's what you need to know — and what you need to do before the 2026 mandatory reporting deadline.

1. What Changed: The OBBBA in Plain English

The One Big Beautiful Bill Act, signed into law in 2025, introduced two above-the-line deductions for tipped workers and FLSA non-exempt hourly employees. Employees claim these on Form 1040 when they file. You do not change withholding. You do not adjust tax tables. What you do need to do is track these amounts cleanly — because employees can only deduct what they can document.

2. No Tax on Tips — What Qualifies

Employees may deduct up to $25,000 of qualified tip income per year from federal taxable income for tax years 2025–2028.

What Counts as a Qualified Tip

• Voluntary payments from customers — the customer decides whether to tip and how much
• Cash tips, credit card tips, and legitimate tip pool distributions
• Earned in an occupation that customarily and regularly received tips on or before December 31, 2024
• Reported on a W-2, 1099-NEC, 1099-MISC, 1099-K, or Form 4137

What Does NOT Qualify

• Mandatory service charges — automatic gratuities the customer cannot modify are classified as wages, not tips
• Tips received in a Specified Service Trade or Business (SSTB) such as financial services (2025 transition rules apply)
• Employees filing married filing separately are not eligible

3. No Tax on Overtime — What Qualifies

The overtime deduction covers only the premium portion of FLSA-required overtime — the "half" in "time-and-a-half."

• Only FLSA non-exempt employees qualify — the overtime must be required by the FLSA
• Salaried exempt employees (executive, administrative, professional, outside sales) do not qualify, even if paid overtime voluntarily
• If the employer pays double-time instead of time-and-a-half, only the FLSA-required half counts
• Available for both itemizing and non-itemizing taxpayers

4. W-2 Reporting: 2025 vs. 2026 Requirements

2025: Transition Year (No Penalties)

Under IRS Notice 2025-62, employers will not face penalties for failing to separately report tips or OT premium on 2025 W-2s, as long as aggregate wages are correctly reported. The IRS also confirmed that 2025 W-2 and 1099 forms will not be updated with dedicated boxes for these amounts yet.

Employers are strongly encouraged to voluntarily provide this data because your employees need it to claim their deductions:

• Report qualified OT premium in Box 14 of Form W-2 (label: "Qualified OT" or "FLSA OT Premium")
• Provide tipped employees a year-end statement with their occupation code and annual tip total

5. Nebraska-Specific Considerations

The OBBBA is federal law and applies uniformly across all states. But how it interacts with Nebraska's tax code, minimum wage structure, and overtime rules affects how you communicate this to employees and how you configure your payroll system.

Nebraska State Income Tax Still Applies

The OBBBA deduction is federal only. Nebraska state income tax still applies to tip income and overtime wages in full. Nebraska has not enacted a conforming state deduction as of early 2026. Set this expectation clearly with your employees — those who hear “no tax on tips” and assume their Nebraska state tax is also reduced are in for a surprise at filing time.

Nebraska Tip Credit

Nebraska permits employers to pay tipped employees a reduced cash wage (the tip credit), with tips making up the difference to the required minimum. The OBBBA deduction applies to the qualified tips the employee actually receives regardless of how their base wage is structured.

FICA Tip Credit (Section 45B) — Available in All States

The federal FICA tip credit remains in effect and is unchanged by the OBBBA. If you operate a food and beverage business in Nebraska, you may claim a tax credit equal to the employer's FICA share on tips above $5.15/hour. This is an employer credit — separate from the employee deduction — but it requires the same precise tip tracking that OBBBA reporting demands. Confirm with your payroll provider that your tip records support both the Section 45B credit calculation and the new W-2 reporting requirements.

6. Common Employer Mistakes

Treating Service Charges as Tips

Automatic gratuities added to bills are wages — not tips — regardless of how they're labeled. When distributed to employees, service charge revenue doesn't qualify for the OBBBA tip deduction. Keep service charges and tips in completely separate payroll buckets.

Not Isolating the OT Premium

Most payroll systems store total overtime pay, not just the half-time premium. Employees need the premium amount specifically to calculate their deduction. If your system doesn't isolate it, employees must reconstruct it manually from every paystub — or miss the deduction entirely.

Assuming Exempt Employees Qualify

Salaried exempt employees — managers, professionals, outside sales staff — don't qualify for the overtime deduction regardless of what you pay them. Communicating this incorrectly creates false expectations and difficult conversations.

Not Communicating That State Tax Still Applies

Employees who hear "no tax on tips" may assume their state tax is also waived. It isn't. Clarify upfront this is a federal deduction only. Under-withheld state taxes result in a balance due at filing time — an unpleasant surprise for employees who thought they were ahead.

7. How PDS Tracks Tips, OT & Keeps Your W-2s Compliant

8. Frequently Asked Questions