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The IRS has issued an early-release draft of its planned withholding tables for 2026, reflecting changes to the tax code made by the One Big Beautiful Bill Act (OBBBA).
These changes include, but are not limited to, updates to the 2026 federal income tax withholding tables to reflect the permanent extension of the tax rates originally enacted in the Tax Cuts and Jobs Act (TCJA) and the new deductions for qualified tips and qualified overtime compensation.
The OBBBA created two new above-the-line deductions available for tax years 2025 through 2028: a deduction of up to $25,000 for qualified tips paid to employees and self-employed individuals, and a deduction of up to $12,500 ($25,000 for joint filers) for qualified overtime compensation. Employers and other payers must file information returns (for example, Forms W-2 and Forms 1099-NEC) with the Social Security Administration (SSA) or IRS, as applicable. Employers must furnish statements to tip recipients showing cash tips received and the Treasury Tipped Occupation Code of the tip recipient, or to overtime recipients showing qualified overtime compensation paid during the year, as applicable. However, the IRS has provided transition relief in IRS Notice 2025-62 to employers and payers for the 2025 tax year reporting requirements. These deductions can significantly reduce taxable income for employees in tipped or hourly roles, making accurate withholding adjustments essential.
To accommodate these changes, the IRS previously released draft Forms W-4 and W-4P for 2026 to allow employees to adjust their withholding to account for the new deductions. Unlike the 2025 Form W-4, the draft 2026 Form W-4 instructs employees who expect to claim the qualified tips and overtime deductions to enter estimated amounts in the included deductions worksheet. Next, the sum of all anticipated deductions should be reported on line 15 of the worksheet and in Step 4(b) of Form W-4.
Employees should ensure they are using the latest versions of these forms. Employers must use an employee’s updated Form W-4, if one is submitted by the employee, and the federal income tax withholding procedures in Publication 15-T to allow the employee to account for their expected deduction and receive more money in each paycheck instead of waiting until filing their income tax return to receive the full benefit of the deductions.
While 2025 is a transition year for reporting, 2026 marks the point when employers need to fully implement these changes. Taxpayers should anticipate further guidance on the qualified tips and qualified overtime reporting methods to ensure compliance with the new laws.
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