What will change on the 2026 W‑2 and 1099 forms for reporting qualified overtime and tips, and how should employers prepare?
Executive summary
Beginning with tax year 2026, Forms W-2 and the 1099 series will be revised to require separate reporting of “qualified tips” and “qualified overtime compensation,” ending the temporary transition relief provided for 2025; employers must overhaul payroll tracking, reporting mechanics, and documentation practices to avoid substantial penalties and anti‑abuse scrutiny [1] [2] [3]. The IRS/Treasury has issued transitional guidance for 2025 but has made clear the 2026 forms will include new boxes/codes and that payroll systems, payroll vendors, and HR teams should be prepared now [4] [5] [6].
1. What exactly will change on the W‑2 and 1099 forms in 2026
Starting with the 2026 tax year the IRS expects to update Form W‑2 and Forms 1099 (including 1099‑NEC, 1099‑MISC and 1099‑K) so that qualified overtime compensation and qualified tips appear as separately reported amounts in dedicated boxes or coded fields rather than buried in aggregate wage or payment totals [1] [2] [7]. The requirement extends to payors of non‑employee tips and some third‑party settlement reporting, with additional data elements—such as the occupation of the tip recipient for certain 1099 reporting—anticipated to be included [6] [8]. The agency has released draft forms and noted that by 2026 separate accounting will be mandatory, replacing the voluntary/approximate methods permitted for 2025 [5] [9].
2. Why the change matters: deductions and eligibility hinge on the new reporting
The form changes implement deductions created by the One, Big, Beautiful Bill Act that allow individuals to deduct qualified tips and the premium portion of overtime compensation, but eligibility for those deductions requires the amounts be included on a statement furnished to the individual (Form W‑2, Form 1099, or other specified statements) which is precisely why separate reporting will be required beginning in 2026 [10] [4]. For 2025 the IRS provided guidance allowing taxpayers to substantiate deductions without separate boxes on official forms, but that transition relief was explicitly time‑limited [4] [11].
3. Compliance risk and enforcement: penalties and anti‑abuse focus
The IRS has warned that failure to include the newly required information on 2026 returns could trigger penalties that practitioners have estimated in the range of roughly $60 to $680 per incomplete W‑2, and Treasury has signaled forthcoming anti‑abuse rules to prevent reclassifying wages as tips to game deductions [3] [6]. The guidance also makes clear that these deductions do not change payroll‑tax treatment—qualified tips and overtime remain subject to FICA and FUTA—so employers cannot avoid employment tax obligations by labeling pay differently [6] [12].
4. Practical steps employers must take now to prepare
Employers should inventory job classifications to identify employees in tip‑eligible occupations, configure timekeeping and payroll systems to isolate the “premium” portion of overtime pay and designated cash tips, and coordinate with payroll vendors to map new W‑2/1099 fields and adopt consistent methodologies for identifying qualified amounts [5] [13] [6]. Documentation of the chosen reasonable method for 2025 and the formal methodology to be used in 2026 will be crucial; the IRS has allowed reasonable approximations for the transition year but expects precise reporting thereafter [9] [11].
5. Communication, audit readiness, and vendor coordination
Employers should provide interim statements to employees showing amounts that may qualify for deductions even where 2025 reporting remained unchanged, train HR and payroll staff on definitions and limits, and audit tip and overtime practices to preempt reclassification or recordkeeping weaknesses that could attract enforcement or claims from workers [12] [13] [6]. Engaging payroll providers, accounting firms, and legal counsel now will be essential to test data flows, implement new codes, and ensure 1099‑K and other third‑party reporting aligns with employer records [6] [14].
6. Remaining uncertainties and where to watch for final rules
Key details remain subject to forthcoming Treasury regulations and IRS form instructions—most notably precise coding requirements, anti‑abuse rule specifics, and how state reporting interacts with federal changes—so employers must monitor IRS releases and draft forms closely and avoid asserting rules that the current guidance has not yet finalized [6] [1] [2]. The available guidance repeatedly emphasizes a phased approach and grants 2025 relief, but leaves the specifics for mandatory 2026 reporting to continuing IRS/Treasury rulemaking and finalized form designs [4] [9].