Year-End Payroll Checklist: New W-2 Reporting for Overtime and Tips, and the $2,000 Threshold for 1099s

Forms W-2 for 2026 are the first that must separately report qualified overtime and tips, and the reporting threshold for Form 1099-NEC has risen from $600 to $2,000. Here is what employers should confirm before January.

The 2025 federal tax law created two deductions for workers, one for qualified tips and one for qualified overtime, available for tax years 2025 through 2028. Employees claim the deductions, but employers carry the reporting burden, and for 2026 it is no longer optional: the IRS has said that the transition relief it allowed for 2025 does not carry over to later years. Forms W-2 for 2026 are due to employees and the Social Security Administration by February 1, 2027, because January 31 falls on a Sunday, and what they must show depends on records payroll should have been keeping all year. The same law raised the reporting threshold for Form 1099-NEC and many 1099-MISC payments, which changes the year-end routine for any business that pays contractors.

Qualified Overtime Means Only the FLSA Premium

Starting with the 2026 forms, each employee’s qualified overtime for the year goes in box 12 of Form W-2 under the new code TT. The IRS defines qualified overtime narrowly: it is only the premium portion of overtime that section 7 of the Fair Labor Standards Act requires, which for most employees is the extra half of the regular rate for hours over 40 in a workweek. Overtime paid because of state law, a union contract, or company policy counts only to the extent it does not exceed what the FLSA requires, and an exempt employee, meaning one the FLSA does not entitle to overtime at all, has no qualified overtime, however much extra the employer chooses to pay. Employers report the full qualified amount even if it exceeds what the employee can deduct (an employee’s deduction tops out at $12,500, twice that on a joint return, and shrinks once modified adjusted gross income passes $150,000, or $300,000 on a joint return), and a mistake has to be fixed with a Form W-2c. The question for every employer with hourly staff is whether payroll has been separating that premium from straight-time pay since January; if it has not, the time to rebuild the numbers is now, not the last week of January.

Tips: New Codes and a Narrower Definition

Tipped employers have new entries of their own. Code TP in box 12 carries the cash tips employees reported to the employer during the year, and the old box 14 has been divided so that box 14b can hold the employee’s Treasury tipped occupation code. The deduction itself, up to $25,000 a year with the same income phase-out thresholds, applies only to qualified tips in an occupation on the Treasury’s list, which final regulations published in April 2026 put at more than 70 occupations. Those regulations also confirm that a mandatory service charge is not a qualified tip unless the customer can decline or change it, so an automatic gratuity added to large-party checks should not be treated as tips for this purpose. Tips remain subject to income tax withholding and payroll taxes as before.

Withholding and the 2026 Form W-4

Payroll cannot decide on its own to withhold less because an employee may qualify for either deduction. Under the IRS guidance, withholding changes only when the employee submits a new Form W-4, and the 2026 form accounts for the deductions in step 4(b). An employee who asks payroll to stop withholding on overtime should be pointed to the W-4 rather than accommodated informally.

The $2,000 Threshold for Forms 1099-NEC and 1099-MISC

Starting with payments made in 2026, the threshold for reporting nonemployee compensation on Form 1099-NEC, and many of the payments reported on Form 1099-MISC, rises from $600 to $2,000, and the IRS has said the figure may be adjusted for inflation beginning in 2027. Backup withholding now follows the same $2,000 line. Separately, payment platforms must issue Form 1099-K only when a payee receives more than $20,000 across more than 200 transactions. Fewer forms will go out, but the higher threshold does not change whether a worker is properly classified as a contractor, and a payment below the threshold is still income to the person who receives it. We would keep collecting a Form W-9 from every vendor before the first payment, because a vendor that crosses $2,000 in December creates a filing obligation the business will not want to discover in January. Forms 1099-NEC for 2026 are due February 1, 2027.

What to Confirm Before January

Every employer should confirm with its payroll provider now that qualified overtime has been tracked separately all year and will flow to box 12 code TT, that tipped employees are mapped to the right Treasury occupation code for box 14b, and that automatic service charges are being treated as service charges rather than qualified tips. Businesses that pay contractors should use the year-end review to revisit classification, because the overtime rules turn on who is actually an employee under the FLSA. We help employers review contractor relationships, wage and hour practices, and the agreements behind them, and we work alongside their CPAs and payroll providers on the execution.

This article is for general informational purposes only and is not legal or tax advice. It reflects IRS guidance as of publication, which may change. Reading it does not create an attorney-client relationship.

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