As a small business owner or payroll manager, accurate W-2 reporting is critical—not only for staying compliant with IRS regulations but also for ensuring your employees receive correct information about their wages, overtime, and tips.

Whether you operate a restaurant, salon, retail shop, or another service-based business, properly tracking overtime pay and employee tips is essential. At Wilson Accounting Group, we help small businesses navigate these requirements with confidence.

Here’s what you need to know about how overtime and tips should be reported on Form W-2.

Form W-2, Wage and Tax Statement, is issued by employers each year to report an employee’s annual wages and the taxes withheld. It’s also sent to the IRS and Social Security Administration, so accuracy is not optional—it’s a legal requirement.

From a tax perspective, the IRS requires a specific form—Form 2848: Power of Attorney and Declaration of Representative—to allow someone to:

• Sign your tax returns
• Communicate with the IRS on your behalf
• Access confidential tax information
• Represent you during an audit or tax appeal

Even if someone already holds a general or durable POA, they must complete and submit Form 2848 to be recognized by the IRS for tax matters.

Tip: If you’re managing a family member’s finances, don’t assume your general POA covers taxes. Filing Form 2848 is essential for IRS recognition.

Overtime is typically any time worked over 40 hours per week, and must be paid at 1.5 times the employee’s regular hourly rate (under the Fair Labor Standards Act—FLSA).

How to Report Overtime on the W-2:

• Box 1 (Wages, tips, other compensation): Overtime wages are included here as part of total taxable income.
• Box 3 (Social Security wages) and Box 5 (Medicare wages and tips): Overtime earnings are also included here, up to applicable limits.
• Overtime is not broken out separately on the W-2, but must be properly documented in payroll records.

Tip: Make sure your payroll system calculates overtime correctly and classifies it as taxable income.

Employers in tip-based industries must report both cash and non-cash tips as income. Employees are required to report tips to their employer when they receive $20 or more in a month.

How to Report Tips on the W-2:

• Box 1 (Wages, tips, other compensation): Include all reported tips—these are part of the employee’s taxable income.
• Box 5 (Medicare wages and tips): All tips are subject to Medicare tax.
• Box 7 (Social Security tips): This shows tips that are subject to Social Security tax. This is separate from regular wages in Box 3.
• Box 8 (Allocated tips): If you’re required to allocate tips (common in large food or beverage establishments), report them here. These are tips the employer assigns to the employee when reported tips are less than 8% of gross receipts.

Important: Employers are responsible for withholding and remitting payroll taxes on reported tips. Failure to do so can result in penalties.

Underreporting tips – If employees don’t report their tips to you, you’re still on the hook for making a reasonable effort to calculate and report them accurately.

Miscalculating overtime – Bonuses, commissions, and certain other payments may affect the “regular rate” used to calculate overtime.

Incorrect W-2 boxes – Misplacing tip income in the wrong box can cause mismatches with IRS and SSA records.

Managing payroll—especially for businesses that pay overtime and handle tips—requires precision and up-to-date knowledge of IRS rules. At Wilson Accounting Group, we provide:

• Full-service payroll support, including W-2 generation
• Online employee onboarding and tip tracking
• QuickBooks payroll integration and training
• Compliance reviews for FLSA and IRS regulations

Whether you’re preparing for year-end reporting or setting up systems to track overtime and tips, we’re here to keep your business compliant and efficient.

Accurate W-2 reporting isn’t just about avoiding penalties—it’s about protecting your employees, your business reputation, and your bottom line. Let our experienced team handle the details so you can focus on running your business.