IRS Plans New Relationship With Payroll, Guidance on Deductions

The Internal Revenue Service is planning to expand its offerings to the payroll industry in 2027 and finalize regulations related to the deductions for qualified tips and overtime, IRS officials said March 17.

“We are in the process of transforming our engagement strategy with the payroll industry,” said Derek Ganter, the IRS’s director of outreach and communication. This includes plans to add a payroll track to the IRS’s Nationwide Tax Forum conferences starting in 2027, he said at PayrollOrg’s Capital Summit in Arlington, Virginia.

“What would bring value to you? What would be the incentive for you to attend something like that?” Ganter asked attendees about the Nationwide Tax Forum.

The IRS is also planning to include payroll professionals in what Ganter called the “pre-decisional process,” he said to applause from attendees, citing an example of feedback sessions done on recent form changes.

The goal is to correct things the agency gets wrong quickly and “not have to do things over and over and over again,” Ganter said.

Ganter used the employee retention credit as another example. “We messed that up four or five times before we finally figured out how to get it right,” he said. “Unfortunately, if we had had listened to the tax professionals, we probably would have got it right the first time.”

Marcia North, a senior tax analyst in the Stakeholder Liaison Office, highlighted some of the IRS’s online tools, including a recent update to the Tax Withholding Estimator to account for the provisions of the One Big Beautiful Bill Act (Pub. L. 119-21).

North also highlighted the Business Tax Account, which allows businesses to view account transcripts, make deposits, and view some notices and letters. “It’s not unlike your account that you have at your bank,” she said.

The IRS is currently integrating a chatbot into its platforms that handles collection issues which can be given to a real person if necessary, North said.

North also mentioned the Document Upload Tool, which allows taxpayers to upload documents to respond to notices or letters. Not all notices or letters are represented yet, but the number of those that are is growing, she said.

Additionally, should a taxpayer be working with an IRS employee directly, the employee can share a number that routes the uploaded document back to them, North said. “Use DUT because it helps you not to have to go to the post office and have to rely on when the Service gets that document,” she said, adding that the tool tells the user if a file was accepted.

Agency Moves Closer to Finalized Regulations

IRS Office of Chief Counsel attorneys Andrew Holubeck and Mikhail Zhidkov addressed the deductions for tips and overtime provided by the OBBBA.

“I want to stress that the employers are reporting cash tips, not qualified tips” that qualify for the deduction, Holubeck said, and it will be down to employees to determine which are qualified tips under the “soon-to-be-finalized” regulations. Employers should report all overtime and tips, even those that exceed the maximum amounts subject to the deductions, the attorneys said.

The 2026 Form W-2 includes two spaces in Box 14b for Treasury Tipped Occupation Codes. In cases where three or more apply to an employee, “just pick two that make sense,” Holubeck said. “There’s no formula. You have to figure out which two you put in there.” He also indicated that similar changes would be made to applicable Forms 1099.

Zhidkov addressed the deduction for overtime, which is based on compensation required by section 7 of the Fair Labor Standards Act above the employee’s regular rate of pay. “The guidance that we’ve issued thus far is applicable to the year 2025 and we are hard at work addressing issues that come up for 2026,” he said, referring to Notice 2025-62 and Notice 2025-69. Respectively, the notices provided relief to employers from reporting tips and overtime for 2025 and guidance to individuals who received qualified tips or overtime in 2025.

“I realize that there’s a tremendous amount of questions about the extent of that reporting and exactly how to compute that amount, and we’re working on a lot of those questions right now,” Zhidkov said.

In response to a question on when regulations on the tip and overtime deductions would be finalized, Holubeck said, “I can say we are close” on final regulations, but that the proposed regulations can also be relied on.