Reporting Overtime and Tips: What Employers Need To Know

Written by Dianne Wilson, Lisa Billings and Harry Waugh on August 19, 2026

The One Big Beautiful Bill Act (OBBBA) introduced a new tax benefit that allows employees to deduct certain income from overtime and tips. While the legislation passed in July 2025, the IRS continues to release relevant guidance for employers navigating the tax implications of these changes.

Reporting Overtime for 2025

Originally, when the OBBBA created this new deduction, overtime was expected to be reported on the W-2. However, the IRS and payroll industry needed more time to update official tax forms (including W-2, 1099-NEC, 1099-MISC and 1099-K) to show these amounts separately.

Because of this delay, there were no changes to these tax forms for 2025. Employers were not required to break out tips or qualified overtime on these forms for 2025.

Reporting Overtime for 2026

Beginning with the 2026 tax year, employers should separately report qualified overtime compensation for employees on Form W-2 box 12 code TT. Payors should separately report qualified overtime compensation for independent contractors on Form 1099-MISC box 14 or Form 1099-NEC box 1d.

Only the overtime premium required under the Fair Labor Standards Act (the “half” in time-and-a-half) qualifies for the deduction. And remember, even though these amounts may qualify for a tax deduction, overtime pay is still subject to Social Security and Medicare taxes.

Reporting Tip Income for 2025

The OBBBA also introduced a deduction for tip income. Because the IRS forms (W-2 and 1099s) were not updated for 2025, employers didn’t need to change how they reported tips on Form W-2 or other information returns.

Reporting Tip Income for 2026

The new reporting boxes and requirements (including separate reporting of cash tips and the employee’s occupation) will start with the 2026 tax year.

Accurate payroll and tip records will be essential for 2026. Employers should work with payroll providers and HR teams to update systems and processes so they can track and report tips in the new required format next year. For 2026, employers will be required to report qualified tips in Box 12 code TP on Form W-2.

It’s also important to note that tips remain subject to Social Security and Medicare taxes, so standard payroll tax rules still apply.