Preparing for Future Tip and Overtime Income

/in /by

The IRS has announced that no changes will be made to Form W-2 or other information returns regarding overtime and tip wages for Tax Year 2025, as part of the phased implementation of the One Big Beautiful Bill Act (OBBBA). This decision ensures stability for the upcoming tax season, allowing employers and payroll providers to continue using current procedures for reporting and withholding. For more details, visit the IRS announcement at IRS announces no changes to individual information returns or withholding tables for 2025 under the One Big Beautiful Bill Act | Internal Revenue Service. 

However, the IRS is preparing for updates in Tax Year 2026, including changes to how tips and overtime pay are reported. To ensure a smooth transition, tax preparers should proactively develop procedures to collect accurate data on overtime hours, overtime pay, and tip income. These steps will help clients comply with future requirements and claim OBBBA-related tax benefits efficiently. 

Action Steps for Tax Preparers 

  1. Collect Overtime Data: Encourage clients to provide detailed records of overtime hours and pay. Sources such as the employee’s final pay stub of the year or the annual report from their payroll service. These documents typically include cumulative overtime hours and earnings, which will be critical for accurate reporting under the new 2026 rules. 
  2. Track Tip Income: For clients in tip-based industries, such as hospitality, ensure they maintain precise records of tip income. Pay stubs or payroll service reports often summarize reported tips. 
  3. Educate Clients: Inform clients about the upcoming changes and the importance of maintaining consistent records. Provide guidance on how to access and organize data from pay stubs or payroll reports. Consider creating templates or checklists to streamline data collection. 
  4. Stay Informed: The IRS will release additional guidance for TY 2026 in the coming months. Regularly check for updates and participate in IRS webinars or industry training to stay ahead of new reporting requirements. 

By establishing these procedures now, tax preparers can reduce errors, save time, and position their clients for success when the OBBBA changes take effect in 2026. Taking proactive steps today will ensure a seamless transition and help clients maximize their tax benefits.