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On July 4th, 2025, President Donald Trump signed into law the One Big Beautiful Bill Act (Act), which, among other things, established new above-the-line tax deductions that could change the Form W-2 as we know it today. Specifically, the Act created these deductions for what it calls “qualified tips” and “qualified overtime compensation.” In addition to other laws established by the U.S. Department of Labor (DOL), tips and overtime rules are regulated under the Fair Labor Standards Act (FLSA). The FLSA is one of the most essential labor laws that affects most workplaces. Failure to comply with any labor or employment laws can lead to hefty fines and penalties. Recently, the DOL rescinded earlier statements regarding using alternative assets for 401(k) plan contributions.
Overview of the Form W-2
Chiefly, according to the Internal Revenue Service (IRS), “every employer engaged in a trade or business who pays remuneration, including noncash payments of $600 or more for the year (all amounts if any income, social security, or Medicare tax was withheld) for services performed by an employee must file a Form W-2” for each employee (even if the employee is related to the employer) who fits the following qualifications:
- Income, Social Security, or Medicare tax was withheld.
- Income tax would have been withheld if the employee had claimed no more than one withholding allowance or had not claimed exemption from withholding on Form W-4, Employee's Withholding Allowance Certificate.
Comparatively, only employees get a Form W-2. Freelancers and other independent contractors don’t get W-2 forms.
Updates to the Form W-2 as Dictated Under the One Big Beautiful Bill Act for 2025
In order to comply with the new tax deductions for “qualified tips” and “qualified overtime compensation,” the Act requires new information to be included on the Form W-2. Specifically, according to Littler, employers must add:
- the total amount of cash tips reported by the employee, as well as the employee’s qualifying tipped occupation; and
- the total amount of qualified overtime compensation.
However, on August 7th, 2025, the IRS issued a news release regarding these W-2 updates. The agency stated that the Form W-2 will remain unchanged for the tax year 2025.
Form W-2 Updates for Tax Year 2026
Subsequently, on August 15, the IRS published a draft of the W-2 form that could be used for 2026. Specifically, aside from changes associated with the Act, updates include:
- new instructions directing employers to use Box 12 to report the employee’s “qualified tips” using code “TP” and “qualified overtime compensation” using code “TT.”
- a new Box 14b for employers to report the employee’s qualifying occupation (referred to as the “Treasury tipped occupation code”).
Employer Takeaways
In conclusion, the IRS wants to make it clear that this latest Form W-2 update is an early release draft only. In short, employers should not be using this newest form to meet tax and overtime reporting requirements. Employers should keep paying attention to IRS announcements in the near future, as the agency is expected to release additional guidance in the coming weeks.
