By: Fred Preis and Rachael Jeanfreau
The new Federal tax law changes will require employers to ensure that payroll systems and accounting procedures are ready to support those revisions.
Many employers will need to address three specific issues:
First, there is a requirement for affected employers to report cash tips (which includes credit card and other similar tips) including Treasury Tipped Occupation Codes, to employees on Form W-2. As such, payroll systems must be able to properly identify and segregate this “qualified tip” information. The draft Form W-2 for 2026 has new boxes and codes for reporting qualified tips and each employee’s tipped occupation.
The second requirement concerns overtime pay. Recent IRS guidance clarifies that the only overtime eligible for the qualified overtime tax deduction is the overtime required by the Fair Labor Standards Act for weekly hours worked above 40 hours (paid to covered, nonexempt employees under the FLSA). Starting with amounts paid in 2026, an employer that pays overtime will have to report this qualified overtime on Form W-2. Qualified overtime would exclude various types of overtime, such as double time, required State overtime, and collective bargaining unit overtime—usually at rates above the required FLSA amounts.
A third requirement is a restriction on employer-provided meals. Beginning in 2026, certain employer-provided meals that are treated as non-taxable or partly non-taxable for employees will no longer be tax deductible by the employer. Because this is a complex determination, employers should review the issue with their tax consultant.
BSW Labor and Employment Law Blog 