Given recent tax law changes affecting employers, companies will want to ensure as soon as possible that payroll systems and general ledger accounting policies are ready to support those changes. In particular, required changes for information reporting and new rules potentially affecting income tax reporting will be effective in this year.
We have talked with employers about three specific issues that they may need to address as 2026 begins. Not all employers have these issues, but quite a few do.
Cash Tips
Starting with 2026 earnings, many employers will need to report cash tips (which includes credit card and other similar tips) and Treasury Tipped Occupation Codes to employees on Form W-2. Employers should confirm with their payroll providers that their systems can 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:
- Box 12 has new codes, including Code TP, which will identify the total amount of cash tips reported to the employer
- Box 14 has parts “a” and “b.” Part “a” is still available for the same uses as in the past. Part “b” will identify the Treasury’s Tipped Occupation Code (identifying what the employee does that would earn qualified tips deductible on the employee’s Form 1040)
Overtime
Recent IRS guidance clarified 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).
The FLSA overtime is almost always the “half” portion of “time-and-a-half” overtime. Starting with amounts paid in 2026, an employer that pays overtime will have to report this qualified overtime on Form W-2.
An employer that pays various types of overtime, such as double time, required state overtime, and collective bargaining unit overtime—usually at rates above the required FLSA amounts—must be able to identify and separate them so the payroll system can feed the proper FLSA overtime amount into the new Form W-2.
The draft Form W-2 proposes new Box 12 codes for reporting qualified overtime. Box 12 has Code TT to report qualified overtime—that is, the FLSA overtime premium.
Employer-Provided Meals
Starting this year, 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.
The two main categories of meals are the Section 119 “meals for the convenience of the employer” and the Section 132(e)(2) meals provided at an employer-provided “eating facility.”
- Section 119 “convenience of the employer” meals are provided where the employees are working and are generally fully tax-free—this rule is only available under limited fact patterns
- Section 132(e)(2) meals are generally served at or near the employer’s business premises, and the employees are charged the direct cost of the meals rather than full fair market value for the meals
To determine the lost deduction for these expenses, employers should review their general ledger items for expenses related to the operation of the Section 132(e)(2) employer-provided eating facility (including labor) or related to the meals provided under Section 119.
Implementing a system early this year to collect and identify these expenses as they accrue would help a company and its tax team estimate and later determine the lost tax deduction for these expenses.
Keep in Mind
IRS drafts offer preparedness and insight. The IRS often publishes one or more draft versions of forms prior to finalizing. While system updates often can’t be completed until forms are final, access to drafts can give employers a head start on testing updates and familiarizing teams with upcoming changes.
The IRS also publishes draft instructions and publications that can provide additional valuable insights into upcoming changes in information reporting and tax treatment of employee pay and benefits.
Even if you don’t anticipate that the new meals rules will apply, now is a good time to check up on related policies and practices. Reviewing meals expense policies and tracking will help ensure compliance with the numerous recent changes.
Watch for more IRS guidance this year that is expected to address each of these issues.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.
Author Information
Anne Bushman leads RSM‘s compensation and benefits tax practice.
Karen Field is a member of RSM’s Washington National Tax practice, specializing in domestic and international compensation and benefits issues.
Amber Salotto is a member of RSM’s Washington National Tax practice, specializing in executive compensation, equity compensation, qualified and nonqualified plans, and other related topics.
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