The short answer
- For 2026, employers report qualified overtime in box 12 of Form W-2 with code TT, cash tips with code TP, and each tipped worker's occupation code in new box 14b. For overtime, the IRS says no relief is available for tax years after 2025.
- Code TT holds only the FLSA premium, the half of time and a half. A $20 an hour worker with 300 overtime hours in the year has $3,000 in code TT, not $9,000.
- Employees can deduct up to $12,500 of qualified overtime ($25,000 on a joint return) and up to $25,000 of qualified tips for 2025 through 2028, reduced above $150,000 of modified adjusted gross income ($300,000 joint).
- The deduction is income tax only. Social Security and Medicare still apply to every dollar of overtime and to tips of $20 or more a month.
- 2026 Forms W-2 are due to employees and the SSA by February 1, 2027. An employee can deduct only the overtime you put in code TT, so a wrong or missing amount needs a Form W-2c.
What changed on 2026 Forms W-2
The One Big Beautiful Bill Act (P.L. 119-21), which the IRS now calls the Working Families Tax Cuts, gave employees two new income tax deductions: one for tips and one for overtime. The employee claims them. You, the employer, supply the numbers, and 2026 is the first year those numbers have their own boxes.
| Box and code | What goes in it | Who gets an entry |
|---|---|---|
| Box 12, code TT | Total qualified overtime compensation: the FLSA premium only | Nonexempt employees paid overtime the FLSA requires |
| Box 12, code TP | Total cash tips reported to you, including tips paid by card | Tipped employees |
| Box 14b | Up to two Treasury Tipped Occupation Codes, with "000" if any tips came from a nonqualifying occupation | Anyone with a code TP amount |
| Box 12, code TA | Your contributions to an employee's or a dependent's Trump account under a section 128 program | Only employers that run such a program |
Box 14 is now split in two. What you used to put in box 14 goes in box 14a.
For 2025 the IRS went easy. Notice 2025-62 gave employers penalty relief, which the IRS said was "limited to returns and statements filed and provided for tax year 2025", and Notice 2025-69 let employees deduct overtime their W-2 never showed. That is over. The IRS's August 2026 overtime FAQs (FS-2026-13, question 20) say "no relief is available for tax years after 2025", and employees "may not consider any amount of qualified overtime compensation in excess of what is reported on Form(s) W-2, box 12, code TT". Leave code TT blank and your employee loses the deduction until you fix the form.
What employees can deduct for 2025 through 2028
| Tips | Overtime | |
|---|---|---|
| Maximum deduction | $25,000 per return | $12,500 per return ($25,000 joint) |
| Reduced when MAGI is over | $150,000 ($300,000 joint) | $150,000 ($300,000 joint) |
| Tax years | 2025 through 2028 | 2025 through 2028 |
| Claimed on | Schedule 1-A (Form 1040) | Schedule 1-A (Form 1040) |
Both require a valid Social Security number, and married employees must file jointly. Neither requires itemizing. Tips qualify only in an occupation on the IRS list (final regulations from April 10, 2026 name more than 70), and only when the customer pays them voluntarily.
You report the amounts. The employee's return applies the limits. Code TP is all cash tips reported to you, not the share you think is deductible. Code TT is all the qualified overtime you paid, even above the cap: the IRS example is an employee with $30,000 of qualified overtime, and all $30,000 goes in code TT.
How to calculate qualified overtime: the half, not the whole
The IRS formula (FS-2026-13, question 12) works week by week:
FLSA hours over 40 in the workweek × one half × the employee's FLSA regular rate = qualified overtime for that week.
Say a warehouse worker earns $20 an hour and works 46 hours every week for 50 weeks of 2026.
| Line | Amount |
|---|---|
| Overtime hours (6 a week × 50 weeks) | 300 |
| Overtime pay at time and a half ($30 × 300) | $9,000 |
| Straight time inside that pay ($20 × 300) | $6,000 |
| Premium, the "half" ($10 × 300) | $3,000 |
| Box 12, code TT | $3,000 |
The $6,000 is ordinary pay for hours worked. Only the $3,000 premium is qualified overtime.
The regular rate is all pay for the week divided by hours worked, apart from a few exclusions the FLSA lists. A bonus that is not purely discretionary goes in (DOL Fact Sheet 56A). If the same worker earns a $46 production bonus one week, the regular rate that week is $966 ÷ 46 hours = $21, and the premium is $10.50 an hour.
Payroll taxes do not change. All $9,000 stays in wages, so Social Security (6.2%) and Medicare (1.45%) take $688.50 from the employee and $688.50 from you. Keep withholding income tax as usual: the IRS says you may not reduce it for the deduction unless the employee gives you a new Form W-4 (the 2026 W-4 handles it in step 4(b)).
What does not count as qualified overtime
Overtime the FLSA does not require is not qualified overtime (FS-2026-13, questions 1, 4, 5 and 16):
- State daily overtime in a short week. A worker on four 10-hour days may earn daily overtime under state law, but the FLSA sees a 40-hour week. Code TT for that week is $0.
- Double time. Only the FLSA's half counts. In the IRS example, 10 overtime hours at $20 paid at double time carry a $200 premium, and $100 of it is qualified.
- Overtime by policy or union contract, such as after 35 hours or on weekends, beyond what the FLSA requires.
- Extra pay to exempt salaried staff. The FLSA never required it.
- Employee-owners with a bona fide 20% equity stake who are active in management. The FLSA treats them as exempt executives.
The mistake: mapping every overtime pay code into code TT
Most payroll systems have several earning codes with "OT" in the name: weekly overtime, daily overtime, double time, holiday premium. Map all of them into code TT at their full amount and the warehouse worker's W-2 shows $9,000 instead of $3,000. The employee may use only the overtime actually qualified (question 21), and you must file a Form W-2c with the SSA and give a copy to the employee "as soon as possible" (question 11).
The opposite mistake is just as costly. A system that reports overtime only inside box 1 wages leaves code TT empty, and the employee cannot deduct a dollar of it without a W-2c.
Tips: code TP and box 14b
Code TP is the total cash tips employees reported to you. The IRS counts tips paid by card and tips shared through a tip-sharing arrangement as cash tips. Tips of $20 or more a month remain subject to Social Security, Medicare and income tax withholding.
Box 14b names the job the tips came from, using the IRS's three-digit codes:
| Code | Occupation |
|---|---|
| 101 | Bartenders |
| 102 | Wait staff |
| 603 | Barbers, hairdressers, hairstylists, and cosmetologists |
| 605 | Manicurists and pedicurists |
Enter up to two codes. A server who also works the bar gets 102 and 101. If any tips came from an occupation that is not on the list, one of the two codes must be "000".
A mandatory service charge is not a tip. The IRS's example is an automatic 18% charge on large parties that the customer cannot decline or change. Give service charges their own pay code so they stay out of code TP.
What to fix in payroll before December 31
- Split overtime earning codes so only the FLSA premium feeds code TT. Daily, double time, holiday and contract premiums get their own codes.
- Check the regular rate. Production bonuses, shift pay and commissions earned in the week belong in it.
- Flag who gets no code TT: exempt staff and owner-managers with 20% or more.
- Backfill 2026. If your system started tracking code TT partway through the year, compute the premium for earlier workweeks from time records and load it before the last payroll.
- Assign occupation codes to every tipped employee and move service charges out of tips.
- Map code TA if you contribute to employees' Trump accounts.
- Run a preview W-2 report in December. Recompute code TT by hand for three employees with the formula above.
- Tie payroll to the books. Gross wages in your general ledger should tie to the payroll year-end report before the W-3 goes out, and any gap should have a reason you can name. BooksGPT reports show the transactions behind each number, so you can see which payroll run a difference came from.
Your year-end close has more on that list. See the year-end bookkeeping checklist.
What happens if a code is wrong after W-2s go out
2026 Forms W-2 are due to employees and the SSA by February 1, 2027 (January 31 is a Sunday). Fix a wrong code TT, TP or 14b entry with Form W-2c. Penalties for incorrect forms depend on when the correct form is filed:
| Correct Form W-2 filed | Penalty per form |
|---|---|
| Within 30 days after the due date | $60 |
| More than 30 days late, by August 1 | $130 |
| After August 1, or never corrected | $340 |
Those amounts apply to filings due after December 31, 2026, so they cover 2026 Forms W-2. A second penalty of the same size can apply to the copy you give the employee (section 6722). Expect employees to check code TT in February. Those who think it is short must ask you for a W-2c, because without one they cannot deduct the difference.
Questions
Do employers pay less payroll tax because of no tax on overtime?
No. The deduction is federal income tax only, taken on the employee's return. Social Security, Medicare and federal unemployment tax still apply to all overtime pay. Social Security and Medicare also apply to tips of $20 or more a month.
Should I cap code TT at $12,500?
No. Report all the qualified overtime you paid. The IRS example puts $30,000 in code TT even though the deduction limit is $12,500, because the employee's return applies the cap.
Does state daily overtime go in code TT?
Only the premium the FLSA itself requires for hours over 40 in the workweek counts. Daily overtime in a week of 40 hours or less adds nothing to code TT.
Do mandatory service charges go in code TP?
No. A charge the customer cannot decline or change is not a tip, such as an automatic 18% charge on large parties. Give it its own pay code so it stays out of the tip totals.
Can an employee deduct overtime that is not on the W-2?
Not for 2026. The IRS says no relief is available for tax years after 2025, so the employee needs a Form W-2c from you showing the amount in code TT.
Sources
- General Instructions for Forms W-2 and W-3 (2026), IRS
- FS-2026-13: Updates to questions and answers about the new deduction for qualified overtime compensation, IRS, August 6, 2026
- Working Families Tax Cuts: Individuals and workers, IRS, August 27, 2026
- Treasury, IRS issue final regulations listing occupations where workers customarily and regularly receive tips (IR-2026-49), IRS, April 10, 2026
- Occupations that customarily and regularly received tips on or before Dec. 31, 2024, IRS, June 28, 2026
- Treasury, IRS provide penalty relief for tax year 2025 for information reporting on tips and overtime (IR-2025-110), IRS, November 5, 2025
- Publication 15 (2026), (Circular E), Employer's Tax Guide, IRS
- Fact Sheet #56A: Overview of the Regular Rate of Pay Under the Fair Labor Standards Act, U.S. Department of Labor
General information for US businesses, not tax or legal advice for your situation. Last updated .