New W-2 Reporting Requirements for Tips & Overtime

The no-tax-on-tips and no-tax-on-overtime deductions created by the OBBBA put money back in employees' pockets—but they also created new recordkeeping and reporting obligations for employers. If you have tipped employees or workers who earn overtime, your payroll processes need to be updated now.

Strategy: Work with your payroll provider to ensure your systems can separately identify and report qualified tips and qualified overtime compensation on 2026 Forms W-2. The IRS will not accept the old practice of bundling these amounts with regular wages.

Here's the whole story: Starting with wages paid in calendar year 2026, employers must separately report qualified tips and overtime compensation on each employee's Form W-2, using new IRS reporting codes. This is a significant departure from prior practice, under which tips were aggregated with wages without occupation-specific detail.

For tips. The exclusion applies only to tips in occupations that "customarily and regularly" receive them. The IRS issued final regulations in April 2026 listing qualifying occupations—primarily food service, hospitality, and beauty services. Your payroll system must track and report qualified tips separately.

For overtime. Only overtime required under the Fair Labor Standards Act qualifies. Discretionary bonuses or premiums above regular FLSA overtime do not. Payroll records must clearly distinguish FLSA-mandated overtime from other premium pay. The IRS provided transition penalty relief for 2025 W-2 reporting. That grace period has ended—2026 is the first year of full enforcement.

Alert: Errors in employer W-2 reporting will create mismatches when the IRS processes employee returns claiming the tips or overtime deduction—potentially triggering notices for both parties.

Tip: The 2026 Form W-4 includes a line for employees to estimate their expected tips or overtime deduction so withholding reflects the benefit during the year rather than at filing.