What Employers Must Report on the 2026 Form W-2

Beginning with tax year 2026, employers must separately report cash tips in Form W-2 Box 12 using code TP, and qualified overtime compensation using code TT. The 2025 transition relief under IRS Notice 2025-62 applied only to that year, so 2026 payroll must track these amounts all year.

2026 is different from 2025 — the grace period is over

The One Big Beautiful Bill Act created two temporary employee deductions for tax years 2025 through 2028: one for qualified tips and one for qualified overtime compensation. For tax year 2025 the IRS granted transition relief under Notice 2025-62 — Forms W-2 were not updated, and employers were not penalized for failing to break these amounts out. Many workers had to reconstruct the figures from their own pay stubs.

That relief applied to 2025 only. For wages paid on or after January 1, 2026, the amounts must appear on the W-2 in their own fields, and standard information-return penalties apply. The practical consequence: the tracking work happens during 2026 payroll runs, not in January 2027 when the forms are due. An employer who did not configure payroll in January is already reconstructing data.

The two new Box 12 codes

Per the IRS General Instructions for Forms W-2 and W-3 (2026):

• Code TP — the total amount of cash tips. The IRS defines cash tips as tips received in cash, charged tips, and amounts received under a tip-sharing arrangement. Note the term is "cash tips," not "qualified tips": the employee's occupation determines how much of it ultimately qualifies for the deduction.
• Code TT — the total amount of qualified overtime compensation.

Employers also report the employee's Treasury-issued tipped occupation code, which identifies whether the role is one that customarily and regularly received tips as of December 31, 2024 — servers, bartenders, bussers, hosts, barbers, delivery drivers and similar roles.

What actually counts as qualified overtime — the premium only

This is where payroll systems most often get it wrong, and the error is worth stating plainly. The IRS defines qualified overtime compensation as the overtime required under 29 U.S.C. § 207 that is in excess of the employee's regular rate. In other words, only the extra half of time-and-a-half counts.

Worked through: an employee earning $20/hour works 45 hours in a week. The five overtime hours pay $30/hour. Of that $30, the first $20 is the regular rate and only the extra $10 is qualified overtime. Five hours × $10 = $50 goes into the code TT total for that week — not $150.

Two further limits catch employers out:

1. Only FLSA-required overtime qualifies. Overtime paid voluntarily, or required only by a state daily-overtime rule or a union contract where the FLSA would not have required it, does not count.
2. Double time is not fully qualified. If you pay 2×, only the 0.5× the FLSA requires is qualified overtime.

You can check a specific week with our overtime pay calculator, and see the deduction effect with the no tax on overtime calculator.

Payroll taxes do not change

A deduction is not an exemption. Qualified tips and qualified overtime remain subject to:

• Social Security — 6.2% each from employee and employer, on wages up to the 2026 wage base of $184,500
• Medicare — 1.45% each, no wage cap (plus the employee-only 0.9% above $200,000)
• FUTA — 0.6% on the first $7,000 per employee after the standard state credit, a maximum of $42 per employee per year
• State income tax — most states have not conformed to the federal tip or overtime deductions, so state withholding continues unchanged

Your employer-side cost of a tip-heavy or overtime-heavy payroll is therefore identical to what it was before these deductions existed. The employer payroll tax calculator shows the full employer-side figure on any wage.

A mid-year checklist

If it is already well into 2026 and this was not set up in January:

1. Confirm your payroll provider has enabled the TP and TT fields. Ask specifically — do not assume an update was applied silently.
2. Assign each tipped employee a Treasury tipped occupation code before year-end.
3. Recalculate January-forward qualified overtime as the premium portion only. Many systems default to the full overtime wage.
4. Keep employee cash tip reports. Employees must report cash tips to the employer by the 10th of the following month, and those reported tips are what flows into code TP.
5. Tell employees what to expect. A server who believes tips are now tax-free will be surprised when FICA is still withheld from every check — see our guide on how tips are taxed.

Why this matters beyond compliance

The employee-side deduction is capped at $12,500 for overtime ($25,000 joint) and $25,000 for tips, and both phase out above $150,000 of modified AGI. An employer who over-reports inflates the employee's deduction and invites IRS correspondence for that worker; an employer who under-reports quietly costs their staff money they were entitled to. In a tight labor market for tipped and hourly roles, getting Box 12 right is a retention detail as much as a compliance one.