Under the One Big Beautiful Bill Act, beginning with tax year 2026 employers must separately report qualified tips and qualified overtime on Form W-2 so employees can claim the new deductions (available 2025-2028). 2025 was a penalty-free grace period, but non-compliance in 2026 and beyond can trigger penalties. The tips/overtime break is a deduction only; wages remain subject to FICA and other payroll taxes and employer withholding is unchanged.
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Starting tax year 2026, employers must separately report tips and overtime on W-2
Why this matters for founders
If you employ tipped or overtime-eligible workers, update payroll to track and separately report qualified tips and overtime on 2026 W-2s now, since the grace period ends with tax year 2025.
Source: Venable LLP
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