What changes to Forms W‑2 and 1099 are expected for reporting qualified tips and overtime beginning in tax year 2026?
Executive summary
Beginning with tax year 2026 the IRS will revise W-2 and multiple 1099 forms so employers and payers must separately report qualified tips and qualified overtime compensation, a change driven by the One, Big, Beautiful Bill Act (OBBBA) and implemented with transitional relief for 2025 [1] [2]. The 2025 guidance gives employers flexibility this year — including optional reporting in Box 14 or on separate statements and penalty relief — but makes clear that separate, standardized reporting on updated W‑2 and 1099 series forms will be mandatory starting in 2026 [3] [2].
1. What the law requires and why forms are changing
Congress added above‑the‑line deductions for “qualified tips” and “qualified overtime compensation” in the OBBBA, and the statute directs employers and other payors to furnish statements showing the total amounts so taxpayers can claim the deductions; to accomplish that, the IRS announced updates to Forms W‑2, 1099‑NEC, 1099‑MISC and 1099‑K for tax year 2026 to provide separate reporting of those amounts [4] [1] [5]. The IRS and Treasury have issued Notices and fact sheets translating the statute into interim rules and examples so workers and businesses can determine what qualifies and how amounts should be calculated [2] [6].
2. What the 2026 forms will do that 2025 forms do not
The revised forms for 2026 will create discrete reporting fields so qualified tips and the “half” portion of FLSA time‑and‑a‑half overtime (qualified overtime) are shown separately rather than buried in total wages or gross receipts; the IRS has signaled specific updates to the W‑2 and the 1099 series to support separate reporting and occupation codes for tipped employees [1] [5] [7]. Payroll‑industry commentary and draft W‑2 previews describe new Box 12 codes (for example, reports indicate a proposed Code TT for qualified overtime) and additions to capture occupation codes and separate tip lines, though final form designs will be set by the IRS for 2026 [8] [9] [10].
3. 2025 transition relief and employer options
For the 2025 tax year the IRS provided a grace period: employers are not required to change W‑2s or 1099s for 2025 and may approximate separate accounting by reasonable methods; employers may instead disclose qualified overtime in Box 14 or furnish a separate statement to employees during the transition [6] [3] [5]. The Treasury/IRS also issued penalty relief for 2025 reporting failures tied to cash tips and qualified overtime, but warned that the relief ends for 2026 when separate reporting becomes mandatory [6] [2].
4. Compliance risks, anti‑abuse signals and payroll implications
The IRS and industry analysts warn that employers cannot legally reclassify ordinary wages as tips to inflate employee deductions, and Treasury expects to issue anti‑abuse regulations; noncompliance after 2025 can lead to per‑form penalties that commentators have estimated could range from roughly $60 to $680 per incomplete W‑2 depending on circumstances [11] [7]. Practically, employers must upgrade payroll systems to track occupation codes, tip logs and overtime that meets the narrow “qualified” statutory definition, and many tax and payroll advisers urge early implementation to avoid disruption when the updated forms are required in 2026 [10] [12] [11].
5. Remaining uncertainties and where to watch for final details
While the headline change — separate reporting on W‑2 and 1099 series beginning 2026 — is settled in law and IRS announcements, details remain subject to forthcoming IRS form revisions, final regulations on eligible occupations and anti‑abuse rules, and the precise placement and codes on the forms [5] [9] [11]. Reporting‑threshold and 1099 changes tied to the same law (for example, increases in certain 1099 thresholds and inflation adjustments) will also alter information‑return burdens and should be monitored alongside the tips/overtime reporting rollout [9] [13].