Tips and Overtime on the 1099: What AP Teams Need to Know

In this episode, compliance expert Jason Dinesen joins host Grace Berube to explain how the tips and overtime deductions created by 2025 tax legislation affect information reporting. Jason clarifies that these are personal deductions, that reporting most often falls on W-2s, and that the redesigned 2026 Forms 1099-NEC and 1099-MISC now include new boxes for tips and overtime. He describes what counts as qualifying overtime under Section 7 of the Fair Labor Standards Act, why an overtime box appears on a form used for contractors, and how differences between Department of Labor and IRS worker classification tests, including Section 530 relief, can lead to that situation. Jason also encourages AP teams to coordinate with payroll providers, accountants, or tax advisors on the required tracking.

WHAT YOU’LL LEARN IN THIS EPISODE

• What the new tips and overtime deductions are, and why most of the related reporting happens on W-2s rather than 1099s.
• Where the new tips and overtime boxes appear on the redesigned 2026 Forms 1099-NEC and 1099-MISC, and when tips paid to a contractor may need to be reported separately.
• What counts as qualifying overtime for the deduction, including the Section 7 Fair Labor Standards Act rule of time and a half beyond 40 hours in a work week.
• Why there is an overtime box on a form used for contractors, and how differences between DOL and IRS worker classification tests, including Section 530 relief, can create that situation.
• Why it helps to coordinate with your payroll provider and the applicable party on your side to set up adequate tracking, since W-2 reporting errors can carry penalties.

Jason Dinesen
President, Dinesen Media Ventures

Jason Dinesen, EA, is a distinguished tax professional and educator with a fervent passion for demystifying complex tax concepts. Jason prepared tax returns and provided accounting services as a practicing accountant from 2009 through the summer of 2025.

He’s also the founder of Dinesen Media Ventures, which provides a diverse range of media content, ranging from continuing education programs for accountants and tax professionals, to podcast production to radio and journalism content.

Recognized for his sharp tax interpretations, Jason is renowned for promptly analyzing the latest tax updates and IRS guidance, sharing his insights with the professional community. Over his career, he has educated more than 200,000 accounting, tax, and HR professionals on various topics. Form 1099 was the very first thing he ever taught on, on April 26th, 2012, at a Sheraton Hotel next to a Lowe’s in West Des Moines, Iowa. He is IOFM’s go-to person for anything related to 1099s and information reporting.

Grace Berube
Senior Content Manager, IOFM

Grace is the Senior Content Manager at the Institute of Finance & Management (IOFM), where she has led content strategy and development since 2022. In this role, she oversees all aspects of IOFM’s digital and event-based content, ensuring it remains timely, relevant, and actionable for all financial operations professionals.

Grace manages IOFM’s robust library of site content, leads the organization’s editorial and member webinar programming, and hosts IOFM’s podcast series. She also oversees a team of subject matter experts who contribute thought leadership and educational articles. In additional, Grace curates and manages all speaker content for IOFM’s in-person and virtual events, ensuring consistency and quality across every touchpoint. With nearly three years in the role, Grace brings a deep understanding of the financial operations landscape and a passion for delivering content that empowers professionals to excel in their roles.

Transcription

Grace Berube: Welcome to the IOFM podcast, the go-to show for accounts payable professionals who want to stay ahead of the curve. Whether it's automation, artificial intelligence, career growth, compliance, leadership, or the trends shaping the future of AP, we're bringing you the real conversations with the professionals driving this industry forward.

Hey, Jason. How are you?

Jason Dinesen: I’m good, Grace. How are you?

Grace Berube: I'm doing great. So happy to have you back on a podcast with us today. And today, we're going to talk about something pretty important. We're going to talk about tips and overtime. Is that right?

Jason Dinesen: That's right. Tips and overtime.

Grace Berube: Perfect. So, there's some new deductions, some new tax legislation. So, I'm going to let you go for it. So, talk to us about what we need to know, how you can track new items and report everything for those tips and overtime.

00:00:51

Jason Dinesen: Yeah. So, this all comes from tax legislation in 2025. They created these two new tax deductions that people can take on their personal tax returns. So, that's the first thing is this is a personal item, but it has implications for the business. And most of the time, we're going to be talking about W-2s and employees with all of this. Really, it's an employee getting tips or overtime, and their employer has to keep track of it and report on the W-2 so that they know how much to deduct on their personal tax return.

However, if you look at the 1099s for 2026, 1099-NEC and MISC have been redesigned with new boxes for tips and overtime. And so, we have a webinar about this that by the time this airs, it will have already happened.

00:01:57 

So, people can go out in the archives or better yet, come to Austin in a few weeks. And we'll be doing it live in Austin as well, talking about tips, overtime and the 1099. So here, we're just giving you a little flavor of what this is all about. 

So, tips and overtime are now deductible, but not all tips and overtime. It has to be qualifying tips. And in a podcast, I won't get into all the ins and outs of what a qualifying tip or qualifying overtime is. But just know that the payer of the tips or overtime has to track those amounts and then report them to the worker at the end of the year. And most of the time, as I said, that's going to be W-2, but sometimes it might be 1099.

00:03:00 

So, an example with 1099 would be if you have a contractor and you ever pay tips to your contractor, you might need to separately report the tips on a 1099 that you send to the contractor, but not always. And we're not going to get into all of the specifications here in this podcast, but just know you might need to. 

And that also brings up a discussion about W-2s, which we talk about 1099s. That's what I talk about. And it's IOFM, we don't really get into W-2s, any of us. However, I would say this, that because there's required W-2 tracking on this as well, you should think of who is your payroll provider, who is it that handles those things, whether it's a payroll company or you do it in-house or it's a combination of both.

00:04:08 

Make sure you're checking with those people, too, to make sure that your tracking is adequate for W-2 reporting as well because you could be penalized if your W-2s don't report things correctly to your employees. 

So, tips. Tips is a little bit easier, I think, because it's just if you're not ever paying a tip to a contractor, then there's nothing to worry about. You don't have to do anything. If you are paying tips, I think that the actionable item is to stop and I always say talk to the applicable party. So, that's whoever it is on your side, whether it's your accountant or in-house counsel or whoever it is, needs to be thinking about 1099 tracking of qualified tips.

00:05:09  

Now, then you get into overtime. Overtime is more complicated and probably more rare, rarer as far as reporting goes. So overtime, here we do have to define what qualifying overtime is for purposes of this deduction. According to the new tax legislation, it is overtime that's paid under Section 7 of the Fair Labor Standards Act, FLSA. Now, that's federal labor law that says hourly employees, and the technical term is non-exempt employees, have to get overtime at a rate of at least time and a half when hours worked in a work week are more than 40.

00:06:07 

That's the basic rule. There are some industries, like law enforcement, that are also covered by Section 7 of FLSA, but they have a different measurement period for determining when overtime kicks in. But the bottom line is if it's overtime paid under Section 7 of FLSA, then it is qualifying overtime.

Now, that type of overtime is almost always—and in fact, if we stop and think about it, it would be always paid to an employee because FLSA is federal labor law that explicitly says it covers employees and not contractors. Which then begs the question of why is there an overtime box on the 1099?

00:07:01  

Which I'm going to play your role, Grace, and I'll just say that you asked that question, and now I'm going to answer it. So, why is there an overtime box on the 1099? So, we have to understand worker classification in order to understand this issue. So, worker classification means you're paying somebody for their services to you. There are only two choices for what type of payment that is. You're either paying an employee or you're paying a contractor. And the thing is with worker classification, there are different government agencies that have different standards for who is an employee and who is a contractor.

00:07:51  

So, the Department of Labor has a particular set of tests to determine if someone's an employee or a contractor and the IRS has its set of tests. And there's a lot of overlap between these tests. And many, many times, you're going to come to the same conclusion, no matter which test you're looking at. If someone is an employee for DOL purposes, chances are they are going to be an employee for IRS purposes.

But once in a while, you could come to a different conclusion. So, you might have someone who is an employee under DOL tests. And if they're an employee under DOL tests, the DOL is the overseer of the Fair Labor Standards Act, which means you might have to pay overtime to that worker. But if that worker is considered a contractor for tax purposes by the IRS, you'd be reporting it on a 1099.

00:09:01 

Now, to just straight-up get that conclusion, that would be pretty rare. However, it would be much more likely to happen with what are called Section 530 employees, which again, without getting too deep in a podcast, Section 530 is something that comes up in IRS audits of worker classification. And the 10-second version of what Section 530 is, is it's a type of audit relief where the IRS is prevented from reclassifying contractors to employees, even if they probably are employees. But this only holds for tax purposes, which means you might have to reclassify those workers for other purposes. 

00:10:02  

So, if you've ever been audited and gotten Section 530 relief, the best thing to do is talk again to whoever the applicable party is on your side, your CFO, your accountant, your tax department, whoever, and have them analyze this situation. Do you have workers where you've gotten Section 530 relief and some of them might be employees in the eyes of the DOL where you're paying overtime to them, but they're contractors for IRS purposes, so you're reporting it on a 1099.

And Grace, how's that for another fun 1099 episode? These episodes, anytime it's 1099s, it's never normal stuff, is it?

Grace Berube: Never. We get the most, I would say, absurd questions, but they're complicated. There's always something new to be thinking about.

00:11:02 

And you are obviously the 1099 expert. And even you were like, you know, I haven't thought about it that way before. So, you're learning a lot from people, our members, all the time. 

Jason Dinesen: All the time. And I tell people, I learn new things all the time. I mean, just the Ask the Experts feature that IOFM has and the questions that come in. It's like, I've never thought about that before. It's a good plug, though, Grace, for our monthly webinars that we have, the Now and Then editorial webinars too. And obviously, the spring and fall conferences, where we can talk more about these things in person or virtually with people. And we give a lot more information about all of these things.

Grace Berube: Yeah, absolutely. And I think it's, you know, a great plug, like you said, for Ask the Expert. If you're not an IOFM member, having access to Jason and our other team of subject matter experts to ask questions that might not specifically be a piece of content that we have on our site, or maybe not specifically covered in a webinar or a podcast, we'll answer those questions for you.

00:12:09 

And Jason is definitely kept busy with all of those. So, always great to have you, Jason. Is there anything else for final thoughts today for this episode? 

Jason Dinesen: No, I think that this covers it. Like I said a couple of times, this topic of tips and overtime on a 1099, we've got a webinar in the archives on it. We'll be talking about it in Austin, depending on when you're listening to this. If that's all water under the bridge, you can still check out that session that'll be out in the archives. And you really, though, have to talk to that applicable party internally to discuss these things, too, because there's required tracking mechanisms that you're going to have to get in place as well. So I think with that, I think that's the main things that we would want to talk about today.

00:12:58 

Grace Berube: Thank you so much, Jason, for joining us today. And we will talk to you on another podcast episode soon.

Jason Dinesen: All right, thank you.

[music playing]

Grace Berube: That's a wrap for this episode of the IOFM podcast. Thank you so much for tuning in. If you enjoyed today's conversation, do us a favor and subscribe, or follow the show so you never miss an episode. And to stay up to date on everything happening in our world, including upcoming events, head on over to IOFM.com.

Continuing Education Credits available:

Receive 1 CEU per hour of listening time towards IOFM programs:

Receive 1 CEU per hour of listening time towards maintaining any AP and P2P related program through IOFM! These programs are designed to establish standards for the profession and recognize accounts payable and procure-to-pay professionals who, by possessing related work experience and passing a comprehensive exam, have met stringent requirements for mastering the financial operations body of knowledge.

Continuing Education Credits available:

Receive 1 CEU per hour of listening time towards IOFM programs:

Receive 1 CEU per hour of listening time towards maintaining any AP and P2P related program through IOFM! These programs are designed to establish standards for the profession and recognize accounts payable and procure-to-pay professionals who, by possessing related work experience and passing a comprehensive exam, have met stringent requirements for mastering the financial operations body of knowledge.