What Employers Need to Know About 2026 Tax Reporting Changes
If your business pays employees or independent contractors, new IRS reporting rules are coming in 2026 that could impact your payroll systems, W-2 filing processes, and 1099 reporting thresholds.
Thanks to the One Big Beautiful Bill Act (OBBBA) passed in 2025, employers will need to prepare for new deductions, reporting codes, and form updates, especially related to employee tips and overtime income.
Here’s a summary from the tax professionals at THF (Thomas Howell Ferguson) of the key changes to know for the 2026 tax year and beyond.
Tip & Overtime Deductions Begin in 2025 — But Reporting Changes Start in 2026
The OBBBA creates new federal income tax deductions for employees who earn:
- Qualified tips income
- Qualified overtime income
🛑 Important: These deductions apply to the employee, not the employer, and do not exempt the income from payroll tax or withholding rules.
Employers aren’t required to report this income differently in 2025, but they can voluntarily include qualified tips in Box 14 of the W-2.
In 2025, businesses should be prepared to:
- Answer employee questions about eligibility
- Help workers understand the new deductions
- Review IRS guidance for voluntary reporting
IRS W-2 instructions and tip income reporting
Eligible Jobs for Tip Income Deduction
In September 2025, the IRS released proposed regulations identifying dozens of eligible occupations for the tip deduction. Each job is assigned a three-digit occupation code for reporting purposes.
The 8 occupation categories include:
- Beverage and Food Service
- Entertainment and Events
- Hospitality and Guest Services
- Home Services
- Personal Services
- Personal Appearance and Wellness
- Recreation and Instruction
- Transportation and Delivery
Employers should begin mapping employees to these codes for 2026 reporting.
Draft 2026 W-2 Adds New Reporting Codes
The draft Form W-2 for 2026 includes several new fields and codes:
- Box 12
- “TA” – Employer contributions to Trump Accounts
- “TP” – Total qualified tips income
- “TT” – Total qualified overtime income
- New Box 14b – Employee’s occupation code (for those with tip income)
These changes apply to 2026 W-2s filed in early 2027. Employers will need to update payroll systems in advance.
New 1099 Threshold: $2,000
Starting with payments made after 2025, the 1099-MISC and 1099-NEC reporting threshold increases from $600 to $2,000.
This applies to:
- Rent
- Royalties
- Nonemployee compensation (contractors)
- Service payments to businesses
🗓️ Applies to 2026 payments → reported in 2027
📈 Indexed for inflation beginning in 2027
This change reduces 1099 filing volume for smaller payments and reflects inflation and administrative cost concerns.
What to Do Now as an Employer or Payroll Provider
While most changes don’t go into effect until 2026, now is the time to prepare:
✅ Review your employee roles for tip eligibility
✅ Map out systems for tracking tips and overtime separately
✅ Prepare to collect and report occupation codes in 2026
✅ Communicate with contractors about the new $2,000 1099 threshold
✅ Ensure your payroll software will support W-2 changes next year
Let THF Help You Stay Compliant
Tax reporting is evolving fast and your business can stay ahead with the right guidance.
At THF, we work with businesses, HR teams, and payroll providers to:
- Understand new reporting obligations
- Implement compliance strategies
- File timely and accurate forms
- Prepare for audits or inquiries
📞 Contact us today or visit www.THF.cpa to start preparing for a smooth 2026 reporting season.
