What’s Changing for Compensation Reporting in 2026?
Businesses are likely busy finalizing 2025 Forms W-2 and 1099-NEC for their employees and others who provide services to them. While there is no required reporting by the payor of qualified overtime or tips for the 2025 tax year, individuals may be able to claim a deduction for those amounts pursuant to P.L. 119-21, often referred to as the “One Big Beautiful Bill Act.” They may seek guidance from the payor in collecting information for their tax advisers or preparing their individual income tax returns.
IRS Guidance: Notice 2025-69 and New Regulations Explained
The Internal Revenue Service (IRS) has released Notice 2025-69 and regulations which provides guidance for individual taxpayers who will be determining whether they can claim a tax deduction for tips and overtime pay received. This is useful guidance for employers in determining amounts to voluntarily report to individuals in 2025, and must be considered in compiling 2026 data for required reporting by the business on Forms W-2 and 1099-NEC in 2026.
Most payroll providers will be depending on businesses to properly determine qualified tips and overtime, which may require separate records to be maintained. Maintaining records as amounts are earned throughout 2026 will be more efficient than compiling the data at the end of the year.
Best Practices for 2025 Voluntary Reporting
The IRS has made clear via Notice 2025-62 that no penalties will be assessed for not reporting these amounts in 2025. The notice encourages employers and payors of qualified tips and overtime to provide such information, which can be done through an online portal or with an additional written statement. In the case of qualified overtime pay, Box 14 of Form W-2 could be used.
Many employers are opting to provide employees with this information. Employers who provide this information may wish to use a separate statement so that the information is not provided on Form W-2 or Form 1099-NEC, both of which are transmitted to the IRS with a transmittal form signed under penalties of perjury that the forms are true, correct and complete.
In many cases, the correct data regarding qualified tips or overtime is not readily available, and thus the 2025 data provided to employees may be best estimates. In addition, by using a separate statement, payors can include appropriate caveats that the information provided is estimated, does not constitute tax advice, and individuals should not rely on it as such.
Qualified Tip Reporting: Key Definitions and Industry Impacts
Proposed Regulation 1.224-1 and Notice 2025-69 provide helpful guidance, including examples of qualified tips. Most notably, tips that are “not voluntary” are not qualified tips. This includes service charges included in restaurant bills and tips where an individual is given a choice between different percentages, but no choice of zero dollars or no tip. It is expected industry practices may be revised as a result of this rule, such that the bill allows the patron to modify the amount.
Qualified tips are amounts received by an individual in an occupation that customarily and regularly received tips before 2025. In addition, amounts cannot be paid for services performed in connection with a specified service trade or business which includes services in the fields of health, law, accounting, consulting, performing arts, athletics, investment services or any trade or business (other than engineering and architecture) where the principal asset of the trade or business is the reputation or skill of one or more of its employees. Thus, if the bartender at a performing arts or athletic center is employed or contracted by the facility, any tips received will not be qualified tips and cannot be deducted.
However, if the performing arts center or athletic facility contracts with a third party to provide restaurant or bartending services and the workers servicing the customers are employed by the third-party contractor rather than the facility, such tips may be qualified tips if they otherwise meet the requirements as noted above.
It is also expected that industry standards will change as needed to conform to this rule.
Overtime Pay Reporting: Compliance With Labor Law Standards
Overtime reporting guidance is detailed in Notice 2025-69 and relies heavily on labor law rules, issued by the Department of Labor under the Fair Labor Standards Act. Generally, those amounts are payments at one-and-a-half times pay for more than 40 hours of work in a week paid to an overtime-eligible employee.
Employers often pay overtime at a rate exceeding one-and-a-half times, or for holiday work, or work in excess of eight hours per day. Such amounts would not be qualified overtime. Where an individual is not paid an hourly wage, there are detailed rules for determining a rate of pay for a 40-hour week.
When weekly pay includes amounts such as performance or safety bonuses — which are often based on a period longer than the pay period in which the amounts are included —these amounts are considered in determining the weekly rate of pay for the week in which the funds are paid. That will affect the qualified overtime amounts for that week, but not for other weeks.
Your Guide Forward
Do you need assistance navigating these updated reporting requirements for qualified tips and overtime pay for your 2025 tax filings? Cherry Bekaert tax advisors are here to guide employers on how these changes impact their business or individual situation.
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