If you have employees, you’ve just filed 2025 W-2 forms for 2025, but it’s not too soon to familiarize yourself with the 2026 version of the form. A lot has changed. You don’t need to issue any 2026 W-2s until February 1, 2027 (even if an employee who leaves mid-year requests one), but you may need to change now your internal payroll recordkeeping and other bookkeeping practices to have information readily available for reporting on 2026 W-2s next year.
Changes to know for 2026 include:
State paid family and medical leave
The state Paid Family and Medical Leave Act (PFML), provides wage replacement to workers for periods in which they need to take time off from work due to their nonoccupational injuries, illnesses, or medical conditions, to bond with a new child, or to care for a family member with a serious health condition or other prescribed circumstance. Employees and/or employers pay into the state system, and benefit are paid by the state to eligible employees. At present, more than dozen states and DC offer this option (or will do so this year), and other states may adopt similar programs. What are the tax treatments for benefits from a state program and contributions to state plans?
Tax treatment of benefits. Different rules apply for family leave versus medical leave:
- Benefits for family leave for bonding or caregiving are taxable, but they are not wages. The state reports the benefits to employees of Form 1099-G.
- Benefits for medical leave may be taxable or not. If attributable to employer contributions, benefits are considered sick pay (i.e., taxable wages). Who reports this: the state or the employer? Probably the state unless it transfers responsibility to the employer. If benefits are attributable to employee contributions, the benefits are tax free.
In some states, benefit which are taxable at the state level may be exempt from state income taxes.
Transition period. The IRS said that 2026 is a transition period. For medical leave benefits (sick pay) that a state pays to an individual in calendar year 2026, a state or an employer is not required to withhold income and employment taxes otherwise applicable to third-party sick pay.
Contributions to PFMLs. Employee contributions are typically made after-tax, so they are still part of taxable as wages subject to withholding and reported on Form W-2. Employer contributions usually are not taxable to employees and are not reported on the W-2. But if an employer picks up an employee’s contribution obligation, then this is treated as taxable wages. In any event, contributions by the employer.
What to do:
Determine whether your state has a PFML. As of now, these states, plus DC, have such a law: CA, CO, CT, DE, MA, ME (benefits begin May 1, 2026), MN, NJ, NY, OR, RI, and WA. MD’s law is effective in 2028. NH, VI, and VT have voluntary programs. Some states have certain exemptions for small businesses. If you or your employees are contributing to a state PFML or employees are receiving benefits, be sure your treatment of payroll and employment taxes are being properly handled.
Qualified tips
Employees and self-employed individuals can deduct up to $25,000 of qualified tips received in occupations that are listed by the IRS. Qualified tips are cash tips, which include voluntary cash or charged tips received from customers or, in the case of employees, through tip-sharing arrangements. Mandatory service charges added to the bill are not qualified tips.
Tips are generally subject to federal income tax withholding and both the employer share and employee share of Social Security tax and Medicare tax if the tips received are $20 or more per month. Employers must file Forms W-2 and furnish statements to tip recipients showing cash tips received and the Treasury Tipped Occupation Code(s) of the tip recipient.
- New box 12, code TP, will be used to report the total amount of cash tips reported to the employer.
- New box 14b will be used to report the Treasury Tipped Occupation Code(s).
What to do:
Be sure to determine if tips received by your employees are in an IRS-recognized occupation. Also determine…and track…qualified tips through the year so they can be properly reported on the 2026 Form W-2.
Qualified overtime payments
Employees can deduct up to $12,500 ($25,000 if married filing jointly) in qualified overtime compensation from their income subject to federal income tax on their income tax return. Qualified overtime is compensation that exceeds the regular rate of pay (such as the “and-a-half” portion of time-and-a-half compensation) that is paid to an individual required by the Fair Labor Standards Act (FLSA).
Overtime compensation is generally subject to federal income tax withholding and both the employer share and employee share of Social Security tax and Medicare tax. Employers must file Forms W-2 and furnish statements to employees showing qualified overtime compensation paid during the year.
- New box 12, code TT, will be used to report the total amount of qualified overtime compensation.
What to do:
Track the “bonus” overtime throughout the year. If, for example, you opt to pay double overtime for an employee who works on a big holiday, only the “and-a-half” portion is qualified overtime.
Employer contributions to Trump accounts
Beginning July 4, 2026, employers may contribute up to $2,500 a year to the Trump account of an employee or of a dependent of an employee, and the amount will be excluded from the gross income of the employee. This is referred to as a Section 128 Trump account contribution.
- New box 12, code TA, will be used to report employer contributions to Trump accounts of an employee or dependent of an employee that are paid pursuant to a Section 128 Trump account contribution program. This is so even though the contribution is not taxable compensation.
Final thought
Familiarize yourself with the new aspects of the 2026 W-2 and make changes in your payroll department accordingly. If you use an outside payroll company, such as ADP or Paychex, it will manage these changes for you. The same is true if you rely on an accountant or other outside party help for your payroll.
Additional resources concerning filing forms can be found in this list of blogs.
