We want to keep you informed of upcoming IRS rules affecting tip reporting and overtime for your employees. Below is a summary of what to expect and how to prepare.
Tips
2025
- No changes to how tips are reported on 2025 W-2s.
- No penalties for failing to separately report qualified tips.
- Under the One Big Beautiful Bill (OBBB), workers may qualify for a new deduction in tax year 2025.
- The IRS encourages employers to provide employees with separate accounting of cash tips.
- “Qualified tips” are cash tips received in an occupation that customarily and regularly received tips on or before December 31, 2024.
- Maximum annual deduction: $25,000, phased out for taxpayers with Modified Adjusted Gross Income (MAGI) over $150,000.
2026
Beginning in 2026, employees must report all cash and non-cash tips (including credit card tips) exceeding $20 per month. Reported tips must be categorized as:
- Voluntary Tips: Cash or charged tips voluntarily paid by customers.
- Non-Voluntary Tips: Tips or service charges paid to bring workers to minimum wage; includes mandatory service charges and automatic gratuities.
- Employees must work in an occupation listed on the IRS Occupations List.
- W-2 changes: Box 12, Code TP will be added starting in 2026.
- The $25,000 maximum deduction with the $150,000 MAGI phase-out still applies to tipped workers.
For questions or assistance, please contact Managepoint HR at HR@managepoint.biz.
Overtime
2025
- No requirement to separately report overtime on 2025 W-2s.
- No penalties for not reporting overtime separately.
- Deduction limit: Up to $12,500 per return (or $25,000 for joint returns).
- Income thresholds: MAGI must be $150,000 or less per individual.
- Only qualified overtime compensation is eligible.
- Calculations must follow FLSA rules, which govern the “regular rate of pay” for overtime.
- W-2 changes: For 2025, overtime will appear in Box 14 as memo code “Es.”
