BY AMY COOLEY
By now, most operators are familiar with the recent changes surrounding tips and overtime. The headlines have been everywhere, and understandably so. For an industry where both are a regular part of compensation, the implications feel immediate. From an HR and operations perspective, the impact is a bit more nuanced. These changes don’t require a new pay model, but they do raise the bar for how clearly pay is tracked, reported, and communicated.
In a previous HR Coach column, we covered the fundamentals of tips, gratuities, and service fees. That foundation still applies. What’s new for 2026 is how certain earnings may be treated at the employee level and how important it is for operators to ensure their systems and processes are aligned.
As always, this is not legal or tax advice, but it is a practical look at what operators should be thinking about now.
What Does “No Tax on Tips” Actually Mean?
The phrase is simple; the reality is more specific. From an employer standpoint, very little changes operationally. Tips remain wages. They still need to be:
❱ Processed through payroll (when collected by the company)
❱ Reported as income
❱ Reflected on pay stubs and W-2s
Your responsibility to track and report gratuities accurately remains the same.
Where the shift occurs is in how those earnings may be treated when employees file their taxes. That distinction matters, but it doesn’t change how tips move through your systems.
For most operators, this reinforces practices already in place. If gratuities are clearly labeled, fully passed through, and consistently reported, your process is aligned with current expectations.
Pro Tip: If your gratuities are already flowing cleanly through payroll and showing up correctly on pay stubs, you’re in a strong position ahead of the new 2026 W-2. Do remember the distinction between qualified gratuities versus mandatory service fees.
Overtime: The New Layer to Watch
Overtime is where this conversation becomes more operational, and where the details matter most.
The core rules have not changed:
❱ Non-exempt employees must still be paid overtime at time-and-a-half for hours worked over 40 in a workweek under the Fair Labor Standards Act (FLSA)
❱ Hours must be tracked accurately
❱ Overtime must still be paid and reported through payroll
What’s new is how certain overtime earnings may be treated and how precisely they need to be identified.
Here’s the key distinction: Only FLSA-required overtime pay qualifies, and even then, it’s not the entire overtime payment—it’s the premium portion (the additional half-time above the employee’s regular rate).
In practical terms:
❱ If an employee earns $20/hour and works overtime, their rate becomes $30/hour
❱ The first $20 is considered regular wages
❱ The additional $10 is the overtime premium
That distinction is what matters for reporting.
For operators, this is especially relevant. Chauffeurs often work variable schedules across a workweek, and events, airport runs, and long-distance trips can quickly push total hours beyond 40. Dispatchers and CSRs may also cross that threshold during busy periods.
EXAMPLE:
A chauffeur works 48 hours in a workweek. Eight of those hours qualify as overtime under federal law. While payroll may show a combined total, it’s important that the system distinguishes between:
❱ Regular wages (40 hours at the base rate)
❱ Overtime base pay (the standard hourly rate for the additional hours)
❱ Overtime premium (the additional half-time required by the FLSA)
That level of detail becomes more important in 2026.
It’s also worth noting that some states or localities require overtime under additional rules, such as after eight hours in a day. Those requirements still apply for pay purposes. However, for this specific federal tax treatment, only the FLSA-required overtime premium tied to the 40-hour workweek is relevant.
The updated W-2 reinforces this. Overtime earnings—specifically the premium portion—must be clearly identifiable. If your payroll system does not separate that premium cleanly, it may be difficult to ensure accurate reporting.
Pro Tip: Make sure your payroll system can clearly isolate the overtime premium tied to the 40-hour workweek, not just total overtime pay. That distinction is what matters for reporting and compliance.
Why Your Payroll Setup Matters More Than Ever
There is not a major overhaul required here, but there is an opportunity to review consistency across your systems. Your dispatch/reservation system, time-tracking tools, and payroll system should all align in how earnings are categorized.
For example, a charge labeled as a gratuity should flow through payroll as a gratuity, or overtime hours should be clearly reflected as overtime.
The 2026 W-2 reinforces this need for clarity. Employees are paying closer attention to how their income is reported, and inconsistencies can create confusion or concern.
From a business standpoint, alignment across systems helps reduce payroll errors, employee disputes, and administrative rework. It also makes your operation easier to manage day to day.
Pro Tip: Your systems should tell the same story. If your booking system, payroll reports, and W-2 don’t align, it’s time to tighten the process.
Communicating With Your Team
When changes are highly visible, expectations tend to move faster than reality. Employees may expect:
❱ Immediate increases in take-home pay
❱ No withholding on tips or overtime
❱ Changes in how their paycheck looks
In practice, payroll will look largely the same. The impact of these updates is more likely to show up at tax time rather than in weekly pay.
That makes communication important.
A short, clear explanation can go a long way. Focus on:
❱ What is changing
❱ What is not changing
❱ What employees will continue to see on their pay stubs
This helps avoid confusion and reinforces trust.
Pro Tip: Clear communication about pay builds confidence. Silence tends to create assumptions.
A Quick Compliance Check
As we are moving rapidly through 2026, this is a good opportunity to review your setup:
❱ Are gratuities clearly labeled and fully reported?
❱ Are overtime hours tracked accurately?
❱ Does payroll distinguish between wages, tips, and overtime premium?
❱ Do your systems align across dispatch, time tracking, and payroll?
❱ Do employees understand how they’re paid?
These fundamentals were important before—and they remain the foundation moving forward.
Clarity Over Complexity
Compensation rules will continue to evolve, and headlines will continue to simplify them. For operators, the priority remains the same: clarity, consistency, and accuracy.
You don’t need to redesign your pay model. You do need to ensure your systems are aligned and your team understands how their pay is structured.
When everything from booking to payroll to reporting is clear, your operation runs more smoothly, your team has more confidence, and your risk stays lower.
And in an industry built on precision and service, that clarity matters. [CD0426]
Amy Cooley is HR Leader for The LMC Groups. She can be reached at
