No Tax on Tips & Overtime: 2026 Employer W-2 Guide

"No tax on tips" and "no tax on overtime" made great headlines. For the servers, bartenders, stylists, and hourly crews who earn that money, the deductions are real and worth up to thousands of dollars a year. But the deduction is claimed by the employee on their personal return. The paperwork that makes it possible is yours.

The One Big Beautiful Bill Act (OBBBA) created two temporary deductions running from 2025 through 2028. Starting with tax year 2026, the government needs your payroll data to have the tips and overtime broken out in a specific way, on a redesigned Form W-2. If your books and payroll system are not set up to capture that split now, you will be scrambling in January 2027, and a wrong W-2 carries a per-form penalty.

Here is the plain-English version of what changed, what you have to report, and what to do before the new year.

In this article

The deduction is the employee's. The reporting job is yours.
The three new W-2 fields for tax year 2026
What counts as a "qualified tip"
What counts as "qualified overtime"
2025 was a free pass. 2026 is not.
The penalty math
Do this before January

The deduction is the employee's. The reporting job is yours.

Nothing about these deductions removes tips or overtime from payroll taxes. Tips and overtime are still wages. They still go in Box 1 of the W-2, they are still subject to Social Security and Medicare (FICA), and you still withhold federal income tax on them the same way you always have. Do not stop withholding, and do not change anyone's paycheck.

What the law added is a set of new fields on the W-2 that tell the IRS and the employee how much of that pay was qualified tips and how much was qualified overtime. The employee then takes the deduction on a new Schedule 1-A when they file. Your only job, but a job with a penalty attached, is to report the right numbers in the right boxes.

The three new W-2 fields for tax year 2026

The IRS finalized the redesigned 2026 Form W-2 in January 2026. Three things are new.

Box 12, code TP: qualified tips

Code TP reports the total cash tips the employee reported to you that qualify for the deduction. This is close to the tip figure you already track, but it only counts tips in an eligible occupation (more on that below).

Box 12, code TT: qualified overtime (the premium only)

This is the one that catches employers off guard. Code TT is not the employee's full overtime pay. It is only the premium portion, meaning the extra half in "time-and-a-half" that the Fair Labor Standards Act requires.

An example. Say a line cook earns $20 an hour and works 50 hours in a week. FLSA requires time-and-a-half, so the 10 hours over 40 are paid at $30 an hour. Of that $30, the regular $20 is ordinary wages and only the extra $10 is the overtime premium. So the qualified overtime for those 10 hours is $10 times 10, which is $100. It is not the $300 of overtime gross, and it is definitely not the whole paycheck. If you dump total overtime wages into code TT, you overstate the qualified amount roughly threefold and hand your employee a wrong deduction.

Your payroll system has to isolate that premium half, per employee, all year, and total it for Box 12.

Box 14b: the occupation code

For tipped employees, Box 14b now carries a Treasury Tipped Occupation Code (TTOC), a three-digit code that identifies the job. Treasury's list covers 68 occupations grouped into eight broad categories: food and beverage, entertainment, hospitality, home services, personal appearance and care, recreation, transportation, and personal services. If an employee earned tips in more than one qualifying role, you can enter up to two codes.

What counts as a "qualified tip"

Not every dollar a customer leaves is a qualified tip. To count, the tip has to be:

Voluntary. The customer decides whether to leave it and how much. A mandatory service charge or an auto-added 20 percent for large parties is not a tip, it is wages, and it does not qualify.
From a listed occupation. The job has to be one that customarily and regularly received tips on or before December 31, 2024, and appears on Treasury's list. Servers, bartenders, barbers, hairstylists, nail technicians, and delivery drivers are in. A back-office bookkeeper is not.
Paid in cash or a cash equivalent. The rules are broad here: cash, check, credit and debit cards, gift cards, casino chips, and mobile payment apps all count. What does not count is non-cash value such as event tickets, free meals, or other goods, and digital assets like crypto and stablecoins.

One more exclusion to know: tips earned in a "specified service trade or business" (fields like health, law, accounting, athletics, performing arts, and consulting) do not qualify even if the person works a tipped job. For most restaurants, salons, and trades this will not come up, but it is worth a glance if your business straddles those lines.

What counts as "qualified overtime"

Only overtime the FLSA itself requires counts, and again only the premium half. If you pay overtime that federal law does not mandate, for example a daily overtime rule under state law, or extra pay under a union contract that goes beyond the FLSA, that portion is not qualified overtime for code TT. This means your payroll needs to distinguish FLSA-required overtime premium from every other kind of premium or bonus pay. Lumping them together is the fast path to a wrong number.

2025 was a free pass. 2026 is not.

For tax year 2025, the IRS gave employers transition relief in Notice 2025-62. The 2025 W-2 and 1099 forms were not redesigned, and you will not be penalized for failing to separately report tips, overtime, or occupation codes on 2025 forms. Some employers voluntarily gave workers a separate statement of their tips and overtime to help them claim the 2025 deduction, but it was optional.

That grace period ends with tax year 2026. The W-2s you furnish in January 2027 must carry codes TP, TT, and the Box 14b occupation code where they apply. There is no relief announced for 2026, so treat this filing season as the real deadline and build the tracking now, across all of 2026, because you cannot reconstruct a clean overtime-premium split in December from records that never separated it.

The penalty math

A wrong or missing W-2 is an information-return penalty, and it is per form. For 2026 filings the amounts run roughly $60 per form if you correct it within 30 days, $130 if corrected by August 1, and $340 if later or not at all. Intentional disregard is $680 per form with no annual cap. Because the same error can be penalized both on the copy filed with the Social Security Administration (Internal Revenue Code Section 6721) and on the copy you hand the employee (Section 6722), a single bad W-2 can be hit twice. Across a 15-person restaurant, small mistakes multiply quickly.

Do this before January

Call your payroll provider now. Confirm in writing that their system will populate Box 12 codes TP and TT and Box 14b for 2026, and ask specifically how they calculate the overtime premium.
Turn on separate overtime-premium tracking. Make sure the FLSA premium half is tracked as its own line, split from regular wages and from any non-FLSA premium pay.
Assign occupation codes to tipped staff. Map each tipped employee to their Treasury Tipped Occupation Code, and flag anyone who works two tipped roles.
Tighten tip reporting hygiene. Make sure reported tips are complete and that mandatory service charges are booked as wages, not tips, so the qualified-tip figure is clean.
Check your occupation list against Treasury's. Confirm your tipped roles actually appear on the list before you promise anyone a deduction.
Keep the books tagged all year. Whatever you use to keep your books, including BooksGPT, make sure tips and the overtime premium are categorized cleanly as you go, so the year-end W-2 numbers come straight from your records instead of a frantic reconstruction.
Do not touch withholding. Keep withholding and FICA exactly as they are. The deduction happens on the employee's return, not on their paycheck.

Get the tracking right in the first weeks of 2026 and the W-2s take care of themselves next January. Leave it until the fourth quarter and you are choosing between a rushed reconstruction and a per-form penalty.

This article is general information, not tax or legal advice. Rules and IRS guidance can change, so confirm specifics with a qualified tax professional for your business.

No tax on tips and overtime: what employers actually have to do in 2026.