Preparing Your Payroll for the 2026 W-2 Changes

Jeremy Springer

10 minutes ago

4 min read

January is a difficult time to discover that your payroll system has been tracking the wrong numbers. With new reporting requirements for tips and overtime, reviewing your payroll system settings now can spare you and your employees unwelcome surprises when W-2s arrive.

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These changes apply to 2026 wages reported on W-2s issued in early 2027. Employers must furnish employee copies and file with the Social Security Administration by February 1, 2027. The separate reporting relief provided for 2025 does not carry forward to 2026.

Know Where the New Information Belongs

The 2026 W-2 adds several fields employers should understand:

Box 12, code TT: Total qualified overtime compensation.
Box 12, code TP: Total cash tips reported to the employer.
Box 14b: Treasury Tipped Occupation Code(s) identifying the work associated with those tips. The former “Other” box becomes Box 14a.
Box 12, code TA: Employer contributions made under a qualifying Section 128 program to an employee’s or dependent’s Trump account, if applicable.

Those entries require dependable payroll records. A software update alone cannot fill gaps in information you never collected.

Separate the Overtime Premium from the Full Overtime Payment

Qualified overtime generally means the additional compensation required under the Fair Labor Standards Act (FLSA), above the employee’s regular rate. For ordinary time-and-a-half pay, that is the extra half.

Suppose an eligible employee’s regular rate is $20 per hour and they work 45 hours in one workweek. The five overtime hours produce $150 in pay: $100 at the regular rate plus a $50 premium. The qualified overtime amount for that week is $50.

A payroll label saying “overtime” does not establish eligibility. Holiday premiums, state-required daily overtime, and extra pay provided under company policy need review to determine whether any portion satisfies a federal overtime obligation. Payments to employees exempt from FLSA overtime do not qualify merely because the employer calls them overtime.

Also check the regular rate calculation. Certain bonuses, commissions, and other compensation can increase that rate above an employee’s base hourly wage. A blanket calculation using base pay can therefore miss part of the required premium.

Give Tip Records a Closer Look

For reporting purposes, “cash tips” includes more than currency. Credit card tips, qualifying electronic payments, and tips received through sharing arrangements are included. Mandatory service charges distributed to employees are wages, rather than tips.

Make sure your records distinguish customer tips from automatic charges and show who ultimately received pooled tips. Compare employee reports with point-of-sale records, checking for missing cash tips and amounts entered twice.

Employees generally must report cash tips totaling $20 or more in a calendar month from that employer by the tenth day of the following month. A consistent electronic reporting process can make this easier, as long as it captures the required information.

Assign the appropriate Treasury Tipped Occupation Code using the IRS list, rather than inventing a code from a job title. The W-2 instructions allow up to two codes and require “000” as one of them if any tips came from a nonqualifying occupation. Code TP reporting does not guarantee that every dollar qualifies for the employee’s deduction.

Keep Deductions Separate from Payroll Taxes

Employees may have heard “no tax on tips” or “no tax on overtime” and expect withholding to disappear. These provisions create individual income tax deductions, subject to eligibility rules and limits. They do not automatically remove the earnings from taxable payroll. Social Security and Medicare taxes generally still apply.

Continue normal withholding procedures. An employee seeking a withholding adjustment should submit a properly completed, updated Form W-4. Report the full qualified overtime amount under code TT, even if it exceeds the employee’s deduction limit.

Test the Process Before Year-End

Ask your payroll provider or software technical support to demonstrate how your actual records will populate the new fields. Then:

Review the full year. If tracking began midyear, reconcile earlier 2026 payroll using timecards, pay records, and employee tip reports. Include former employees.
Check a few calculations yourself. Test a straightforward overtime week, a week with additional compensation, and a tipped employee with pooled tips, where applicable.
Review a draft W-2. Confirm the new entries and existing wage and tip boxes match the supporting records, without double-counting earnings.
Assign responsibility. Decide who resolves discrepancies, approves final totals, and keeps the calculation history.

Protect the Information While You Work

Year-end payroll files contain enough personal information to make them valuable to thieves. Use a secure portal to exchange records, enable multifactor authentication, and limit access to those doing the work. Verify unexpected requests for employee records through a known phone number, even when the message appears to come from the owner. W-2 phishing schemes specifically target payroll staff.

You do not have to wait until January to ask questions. At The Springer Company, we’re here year-round to help you understand what has changed and work through the details. Getting your records ready now gives you time to address problems before they become your employees’ tax-season headaches.

Additional Resources

Legal Disclaimer: This post contains general information for taxpayers and should not be relied upon as the only source of authority. Taxpayers should seek professional tax advice for more information. This information was current at time of posting; we are not responsible for updating this or any blog post/article for subsequent changes in the law or its interpretation.