Beginning with tax year 2026, businesses have new federal information reporting requirements related to tips and qualified overtime compensation. These changes affect Forms W-2, 1099-NEC and 1099-MISC, and Form 1099-K also includes new tip-reporting fields.
The changes are connected to the provisions commonly referred to as “No Tax on Tips” and “No Tax on Overtime.” Despite those names, tips and overtime have not simply become tax-free. The law created new federal income tax deductions that eligible workers may claim on their individual income tax returns for tax years 2025 through 2028. Employers and other payors are now required to separately identify certain amounts so recipients can determine whether they qualify for those deductions.
Eligible employees and self-employed individuals may deduct up to $25,000 of qualified tips per year. Qualified tips generally must be voluntary tips received while performing work in an occupation identified by the Treasury Department as an occupation that customarily and regularly received tips on or before December 31, 2024.
Cash tips include tips paid in cash or charged by customers, including qualifying tip-sharing arrangements. A mandatory service charge is not treated the same as a voluntary tip. For example, an automatic service charge that a customer is required to pay generally does not qualify for the deduction.
The IRS now uses three-digit Treasury Tipped Occupation Codes (TTOC) to identify the occupation in which tips were received. The Treasury Department has published a specific list of qualifying tipped occupations. Employers and other payors may report up to two occupation codes. If tips were received in a nonqualifying occupation, code 000 must be included as one of the occupation codes.
Beginning with the 2026 Form W-2, employers must separately report the amount of cash tips reported by the employee and identify the tipped occupation. Box 12, Code TP is used to report the total cash tips reported to the employer, and Box 14b is used to report the applicable Treasury Tipped Occupation Code or Codes.
These new fields do not replace the normal reporting of employee tips. Reported tips continue to be included in the appropriate wage and tip boxes on Form W-2. The new fields provide additional information needed by the employee when determining the qualified tip deduction.
The 2026 Form 1099-NEC has also been changed to separately identify tips paid to nonemployees. Box 1a reports total nonemployee compensation, Box 1b reports cash tips included in Box 1a, and Box 1c reports the applicable Treasury Tipped Occupation Code or Codes.
This means businesses paying independent contractors who receive tips may have additional information to collect and report for 2026.
Form 1099-MISC also contains new tip-reporting fields. Box 13a reports cash tips included in Box 3, and Box 13b reports the applicable Treasury Tipped Occupation Code or Codes. The tip amount is already included in the appropriate income box; the new field separately identifies the portion treated as cash tips.
Eligible individuals may deduct up to $12,500 of qualified overtime compensation per year, or up to $25,000 for married taxpayers filing jointly. One of the most important parts of the new rule is that the entire overtime payment does not necessarily qualify.
Qualified overtime generally means the portion of overtime compensation required under Section 7 of the federal Fair Labor Standards Act (FLSA) that exceeds the worker’s regular rate of pay. For a traditional time-and-a-half calculation, this generally means only the additional one-half portion qualifies.
Assume an employee normally earns $20 per hour and works 10 hours of qualifying FLSA overtime. The employee receives $30 per hour for those overtime hours, or $300 total. However, the qualified overtime portion is generally only the additional $10 per hour. In this example, $100 would be qualified overtime compensation for purposes of the deduction.
Overtime paid because of an employer policy, union agreement, state law, weekend premium, holiday premium or another arrangement does not automatically qualify. The compensation generally must represent overtime required under the federal FLSA. If an employer voluntarily pays more than the FLSA requires, the additional amount above the federal requirement generally is not qualified overtime compensation.
Beginning with 2026, employers must separately report qualified overtime compensation on Form W-2 using Box 12, Code TT. The employer reports the total amount of qualified overtime compensation paid during the year. The employee determines the actual allowable deduction when filing an individual federal income tax return.
If the qualified overtime amount is omitted or reported incorrectly, the employer may need to issue a corrected Form W-2c. Accurate reporting is important because the information reported by the employer is used by the employee when calculating the deduction.
The 2026 information returns also contain fields for qualified overtime compensation. Form 1099-NEC, Box 1d reports qualified overtime compensation included in Box 1a, and Form 1099-MISC, Box 14 reports qualified overtime compensation included in Box 3.
However, businesses should not assume that ordinary independent contractors qualify for the overtime deduction simply because they receive additional compensation for extra hours. Qualified overtime is based on the federal FLSA, and the IRS has explained that situations involving qualified overtime reported on a Form 1099 are uncommon. The existence of an overtime box on Forms 1099-NEC and 1099-MISC does not mean that every overtime premium paid to an independent contractor belongs in that box.
The new deductions do not mean employers should stop withholding taxes from employee tips or overtime compensation. Employee tips and overtime generally remain subject to the normal federal income tax withholding rules and to Social Security and Medicare taxes. These provisions affect the worker’s individual federal income tax deduction; they do not eliminate the employer’s normal payroll tax responsibilities.
Beginning with payments made after 2025, the minimum reporting threshold for many payments that were previously subject to a $600 threshold increases to $2,000. For example, Form 1099-NEC generally must be filed when a business pays at least $2,000 during the year for services performed by someone who is not an employee. Many Form 1099-MISC payment categories also use the new $2,000 threshold.
The $2,000 threshold does not apply to every information reporting category. Some payments continue to have different thresholds, and backup withholding can require reporting regardless of the total payment amount. Businesses should therefore review the rules for the particular type of payment instead of assuming that every Form 1099 now uses the same threshold.
Businesses should review their payroll and payment records before year-end to make sure they can separately identify cash tips, the occupation in which tips were received, the applicable Treasury Tipped Occupation Code, and qualified FLSA overtime compensation. These amounts must be reported in the correct new fields on the applicable Forms W-2 and 1099.
Employers should pay particular attention to overtime calculations because qualified overtime is not necessarily the same as the total overtime amount shown in a payroll system. Proper reporting may require identifying the portion of the overtime premium that is specifically required by the federal FLSA.
The IRS has already issued additional guidance during 2026 concerning qualified overtime and information reporting. TaxMe will continue monitoring IRS instructions and year-end reporting requirements and will provide additional information if the IRS releases material changes or clarifications affecting Forms W-2, 1099-NEC or 1099-MISC.