The IRS has released a draft Form W-2 and draft Form W-4 for 2026. The draft forms and instructions include provisions for reporting tip and overtime payments that qualify for deduction from federal taxable income under the "One Big Beautiful Bill Act" (P.L. 119-21, OBBBA) for tax years 2025 through 2028 (see Tax Alert 2025-1476).

Earlier, the IRS announced that it will not update 2025 individual information returns/statements (Forms W-2/1099) or withholding tables to reflect those changes (see Tax Alert 2025-1671).

OBBBA requirements on tips and overtime pay

The OBBBA allows individuals to deduct qualifying tips and overtime for federal income tax purposes, effective for tax years beginning in 2025 through 2028.

Reporting tips

The OBBBA imposes a new statutory requirement to report cash tips and the individual's occupation on certain Forms 1099 and on Form W-2. The statute applies these reporting requirements for calendar year 2025. According to an IRS news release, the reporting will apply beginning with Forms W-2 due on February 1, 2027, for calendar year 2026.

Reporting overtime

The OBBA requires employers to report on Form W-2 for tax year 2025 through 2028 the premium portion of overtime that is required under section 7 of the Fair Labor Standards Act. For example, if an employee's hourly rate of pay is $10.00, the overtime rate under section 7 of the FLSA is $15.00 and the premium portion reported on the Form W-2 is $5.00 per hour. The IRS announced earlier this year that this reporting requirement will not apply to the 2025 Form W-2.

Draft 2026 Form W-2

The draft 2026 Form W-2 contains several changes to accommodate employer reporting under the new OBBBA requirements.

Box 12 has three new codes:

• TA — Employer contributions to Trump account
• TP — Total amount of qualified tips
• TT — Total amount of qualified overtime compensation

Box 14 has been split into 14a and 14b:

• 14a — Other (same as previous Box 14)
• 14b — Treasury tipped occupation code (codes to be determined)

Draft Form W-4

The draft instructions for Form W-4 include a section in Step 4(b) of the Deductions Worksheet for the tip and overtime deduction. The IRS has signaled that it will modify the 2026 withholding formula for employers to take into account the new deductions claimed on the Form W-4.

Implications

Although there will be no changes to the 2025 Form W-2, employers may benefit from familiarizing themselves with the draft 2026 changes as soon as possible. Doing so not only provides employers with more time to prepare but also may help them to identify and comment on ambiguities that they would like the government to address in future guidance.