2026 Tip and Overtime Reporting Changes

Well, thanks to the One Big Beautiful Bill Act (OBBBA), there are provisions for deducting certain Tip and Overtime pay from taxable income.  The maximum deduction for Tip income is $25,000 with a MAGI phase-out starting at $150,000 single or $300,000 for marrieds.  Maximum Overtime deduction is $12,500 single and $25,000 for marrieds with the same MAGI phase-out rules.  The challenge, is how to compute the correct amounts.

For the 2025 tax year, some employers took the trouble to report Tip and/or Overtime pay on the W-2s.  They were not required, and most employers didn’t do that.  Which meant, it was up to the taxpayer to be able to come up with their Tip and/or Overtime pay to report as a deduction.  Usually, the last pay stub provided the information needed.  There were a few problems with that.  Only Tip income from certain types of employers were allowed and only Overtime pay that qualified under the Fair Labor Standards Act was allowed.  The IRS issued penalty relief for 2025.  But come 2026, the stricter limitations will apply.  That means that employers will need to follow the guidelines for reportable Tip and/or Overtime that qualifies for 2026.

So, this article is more for the employers out there who employ workers who earn qualified Tips and/or qualified Overtime.  You need to be keeping track of these items in order to properly report them on the 2026 W-2.  The IRS has added two categories to the Box 12 section.  TP for qualified Tips and TT for qualified Overtime.

The key to track for Overtime is to make sure you follow Fair Labor Standards Act provisions in computing Overtime.  The computation involves excess hours worked in a 40 hour workweek.  You must be paying at least time and a half for overtime pay.  So, watch out if you compute normal Overtime on a daily basis.  You will need to keep track of a different Overtime based upon the 40 hour work week.

For Tip income, only the following categories for earning Tips are allowed:  Beverage and food service; entertainment and events; hospitality and guest services; home services; personal services; personal appearance and wellness; recreation and instruction; transportation and delivery.  Only cash based tips are allowed.  Follow the current Tip reporting rules for computing Social Security and Medicare, but report total Tip Income in the designated separate Tip Income box 7.  It is possible the IRS may drop box 7 and just require all Tip income to be reported in Box 12 TP.  More to come on that.

Here’s an example for Overtime.  Let us say you paid Fred $4,350 in Overtime pay in 2026.  The problem is, you computed Fred’s Overtime on a daily basis.  In many cases, Fred worked extra on certain days, then took off early on Fridays, thus his weekly 40 hour Overtime pay only comes to $1,530.  You would only report the $1,530 in Box 12 TT.

Have you heard?  Psalm 44:26 says, “Rise up to help us.  Redeem us for your loving kindness’ sake.”

Kelly Bullis is a Certified Public Accountant in Carson City.  Contact him at 775-882-4459.  As well as on our website at BullisAndCo.com. You can also find us on LinkedIn and Facebook.