The IRS has released its draft of the 2026 Form W-2, revealing several important changes that stem from the One Big Beautiful Bill Act (OBBBA). While these updates won’t take effect until the 2026 tax year, employers and taxpayers should begin preparing now.
Key Changes in the Draft Form
1. New Reporting for Tips and Overtime— For the first time, W-2s will include separate disclosures for qualified tips and qualified overtime compensation. These items are tied to new deductions created under the OBBBA, which taxpayers will be able to claim beginning in 2025.
2. Additional Codes and Fields— Employers will see new codes in Box 12 and expanded reporting in Box 14 to support these changes. One new addition will be a code identifying employees in tipped occupations, which will help determine eligibility for related deductions.
3. Introduction of Schedule 1-A— A new tax form, Schedule 1-A, is being introduced to accommodate expanded “above-the-line” deductions. These include deductions for qualified tips, overtime, charitable contributions for non-itemizers, and certain other expenses.
Timing & Transition
- 2025 Tax Year: Employers will not be required to use the new W-2 format for 2025, but taxpayers can still begin claiming the new deductions on their individual returns.
- 2026 Tax Year: Employers must fully adopt the new reporting requirements. This means payroll systems and processes should be updated during 2025 to ensure a smooth transition.
What Employers Should Do Now
- Review payroll systems to confirm they can track tips and overtime separately.
- Educate HR and payroll staff on the upcoming changes.
- Communicate with employees so they understand how their W-2s will look different starting in 2026.
Why This Matters
These changes are more than just an update to a form; they represent a shift in how certain compensation is treated for tax purposes. Proper planning will help employers avoid compliance issues and ensure employees are positioned to take advantage of new deductions when filing their taxes.
The IRS is expected to issue further guidance before the 2026 form is finalized. To learn more about the technical details, you can view the full summary here.
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