New for 2026 W-2s: Overtime and Tips Reporting for San Diego Employers
The 2026 Form W-2 has new boxes for qualified overtime and tips so employees can claim the new federal deductions. Employers file by February 1, 2027. Here is what to set up now.
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What changed
The 2025 federal tax law created two temporary deductions for workers: one for qualified overtime pay and one for qualified tips. To make the deductions work, the IRS added new reporting to the 2026 Form W-2. According to the IRS 2026 W-2 and W-3 instructions, employers report the total qualified overtime compensation in box 12 with code TT, cash tips in box 12 with code TP, and a Treasury Tipped Occupation Code in box 14b for employees who receive tips.
An IRS fact sheet on overtime published in August 2026 (FS-2026-13) explains the employee side. The overtime deduction is up to $12,500, or $25,000 on a joint return, and phases out for modified adjusted gross income above $150,000, or $300,000 joint. The tips deduction is up to $25,000. Employers report the full qualified amount even when it is above the employee's deduction cap.
What counts as qualified overtime
Qualified overtime is the premium portion of overtime that the federal Fair Labor Standards Act requires, generally the half in time and a half. It is not the full overtime paycheck, and it does not include overtime paid only because of a state rule or a company policy. That matters in California, where daily overtime and double time rules go beyond federal law. The IRS fact sheet also notes that owners who hold 20 percent or more of a business are generally not FLSA-eligible employees for this purpose, and that errors can be corrected on Form W-2c.
Who in San Diego County this affects
Most payroll providers are adding the new fields, but they can only report what your system tracks. If overtime premiums and tips are not separated in your pay codes, the W-2 cannot be right.
- Restaurants, hotels, breweries and hospitality employers with tipped staff from the Gaslamp to Oceanside
- Contractors, manufacturers, logistics and healthcare employers with hourly staff who work overtime
- Any employer whose payroll provider needs the new codes mapped before the first 2027 payroll
- Businesses that pay contractors and file Forms 1099-NEC
1099 changes for 2026
The 2025 law also raised the Form 1099-NEC and 1099-MISC reporting threshold from $600 to $2,000 for payments made in 2026, with inflation adjustments starting in 2027, according to IRS Publication 1099. For payment apps and card processors, the Form 1099-K threshold returned to more than $20,000 and more than 200 transactions. Keep collecting Forms W-9 from contractors at onboarding; the threshold changes the filing requirement, not your need for the information.
California differences and 2027 updates
California does not allow the federal tips and overtime deductions, though it does follow the new information reporting, according to the FTB's summary of federal changes. California's own overtime rules still apply to how you pay employees. On January 1, 2027, the statewide minimum wage rises to $17.40 an hour and the minimum salary for most exempt employees becomes $72,384 a year, according to the Department of Industrial Relations. The City of San Diego sets its own minimum wage, so check the city's notice if you have employees there. The 2027 State Disability Insurance rate had not been announced when this article was published.
What to do before year end
- Ask your payroll provider how it will populate box 12 codes TT and TP and box 14b.
- Separate FLSA overtime premium, California-only overtime and tips into distinct pay codes now.
- Review owner-employees and exempt staff so overtime is not reported for people who are not FLSA-eligible.
- Update exempt salaries and hourly rates for the January 1, 2027 California minimum wage.
- Collect missing W-9s and reconcile contractor payments against the $2,000 threshold.
- Calendar February 1, 2027 for W-2s and 1099-NECs.
How Scalesight helps
Payroll setup and year-end reporting are part of our small business accounting service, and the W-2 and 1099 data flows straight into business tax preparation. If you are not sure your pay codes are ready, the free Growth Audit is a good place to start.
Sources
- General Instructions for Forms W-2 and W-3 (2026), Internal Revenue Service, 2026
- Fact Sheet FS-2026-13: Deduction for qualified overtime compensation, Internal Revenue Service, August 2026
- Publication 1099: General Instructions for Certain Information Returns, Internal Revenue Service, 2026
- California minimum wage to increase to $17.40 per hour on January 1, 2027, California Department of Industrial Relations, 2026
- Summary of Federal Income Tax Changes, California Franchise Tax Board, 2026
This is general information, not tax or legal advice. Tax rules change and the right answer depends on your facts, so talk with a CPA before acting on it.
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Questions owners ask
Do I report overtime above the employee's deduction cap?
Yes. The IRS says employers report the full qualified overtime amount. The employee's deduction limit is applied on their own return.
Is California daily overtime qualified overtime?
Generally no. Qualified overtime is the premium required by the federal FLSA. Overtime paid only because of California rules is not included.
When are 2026 W-2s due?
February 1, 2027, to employees and to the Social Security Administration, because January 31, 2027 falls on a Sunday.
Do I still need W-9s from contractors I pay less than $2,000?
It is good practice. You may cross the threshold later in the year, and backup withholding rules still apply when a contractor does not provide a taxpayer ID.
Make sure your 2026 W-2s are ready
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