New W-2 reporting requirements mean employers need to take a closer look at how overtime and tips are tracked before year-end.
If your business has employees who earn overtime or receive tips, preparing your 2026 Forms W-2 will involve additional reporting requirements.
The One Big Beautiful Bill Act, signed in 2025, introduced new temporary tax deductions for qualified overtime compensation and qualified tips. While these deductions benefit eligible employees, they also change what employers must report.
For businesses, understanding these changes now can help prevent complications when year-end payroll forms are prepared.
What’s Changing on the 2026 Form W-2?
Beginning with the 2026 tax year, employers must separately report certain overtime compensation and tip information.
The IRS provided transition relief for 2025, so these fields were not required on last year’s Forms W-2. They apply beginning with 2026 reporting.
The IRS has introduced new reporting fields:
-
Box 12, Code TT: Qualified overtime compensation.
-
Box 12, Code TP: Cash tips reported to the employer.
-
Box 14b: Treasury Tipped Occupation Code(s). Employers report up to two codes for an employee’s tipped occupation. This box is used when cash tips are reported with Code TP. If an employee’s tips come from a non-qualifying occupation, the code “000” is reported instead.
These details help employees determine which amounts may qualify for deductions on their individual tax returns.
The reporting changes don’t mean every dollar of overtime or tip income qualifies for a deduction. Employers need to understand the distinctions so the appropriate amounts are reported.
Understanding Qualified Overtime Compensation
Qualified overtime compensation isn’t the same as total overtime pay.
The deduction applies to the additional compensation required under the federal Fair Labor Standards Act (FLSA), not the employee’s entire overtime earnings.
For example, consider an employee earning $20 per hour who receives $30 per hour for qualifying overtime. Of that $30, the additional $10 overtime premium is the portion that may qualify for the deduction.
Keep in mind that the FLSA premium is based on the employee’s “regular rate,” which can include items like nondiscretionary bonuses, not just base hourly pay. Only the portion of overtime pay that the FLSA requires counts. If your business pays a higher rate voluntarily, such as double time, only the required half-time premium is reported. Only non-exempt employees covered by the FLSA are eligible.
This distinction matters because payroll systems may record the full overtime payment without separately identifying the qualifying premium.
Overtime paid under company policies or state requirements doesn’t automatically qualify. The compensation must meet the applicable federal requirements.
Employers should confirm that their payroll records distinguish qualifying overtime premiums from other wages. If your business offers different overtime rates or has employees with varying pay arrangements, reviewing those classifications before year-end is especially important.
What About Employees Who Receive Tips?
Businesses with tipped employees must report cash tips and identify employees’ tipped occupations using the appropriate Treasury codes.
For this purpose, the IRS uses the term “cash tips” to distinguish them from noncash items. It includes voluntary tips left in cash and tips charged to a credit card, as well as qualifying tip-sharing arrangements.
Mandatory service charges are treated differently and don’t qualify as tips for the new deduction.
For example, a voluntary tip left by a customer may qualify, while a mandatory service charge added to a bill is treated as wages rather than tip income.
Restaurants and other service-based businesses should review how tips are recorded and confirm that employees’ occupations are classified correctly.
Are Overtime and Tips Now Tax-Free?
No. The new deductions don’t eliminate existing payroll tax requirements.
Employers must continue withholding applicable federal income taxes and Social Security and Medicare taxes.
Eligible employees claim the deductions on their individual income tax returns, subject to applicable limitations.
For reference, the overtime deduction is capped at $12,500 ($25,000 for joint filers), and the tips deduction is capped at $25,000. Both begin to phase out at higher incomes, and both are available for tax years 2025 through 2028.
Employers should not stop withholding payroll taxes on overtime or tips because of these changes.
This is an important distinction for businesses fielding questions from employees who may have heard about the new deductions and assume their paychecks should no longer reflect withholding.
What If You Use a Payroll Provider?
Payroll providers can help manage these reporting requirements, but accurate information is still essential.
If your business uses Gusto or another payroll platform, confirm how overtime and tips are tracked and whether additional information is needed for 2026 reporting.
Businesses processing payroll internally should review whether their systems can identify the amounts required for the new W-2 fields.
It’s also worth checking whether your payroll provider has communicated any year-end deadlines for submitting corrections or additional employee information.
Preparing for Year-End
Forms W-2 must be furnished to employees and filed with the Social Security Administration by February 1, 2027. The usual January 31 date falls on a Sunday, so the deadline moves to the next business day.
Before the final payroll of 2026, employers should review payroll records for accuracy and communicate any outstanding corrections to their payroll provider.
For businesses with tipped employees or multiple overtime arrangements, this may require reviewing how compensation has been classified throughout the year rather than focusing only on the final payroll period.
Addressing these items now can help prevent reporting issues when W-2 preparation begins.
How RLA Can Help
Keeping up with payroll requirements takes time, especially as reporting rules change.
At RLA, we help businesses manage payroll processing and reporting so they can spend less time navigating administrative requirements.
Whether you’re an existing client or considering professional payroll support, contact our team to learn how we can help.
Information current as of October 2026. This article provides general information only and is not tax, legal, or payroll advice for your specific situation. Rules and guidance may change, so please contact our team to discuss how these requirements apply to your business.