No Tax on Overtime and Tips: What Employers Must Report on 2026 W-2s
By Tax Benefit Strategies | Published October 30, 2026 | Updated November 2026 | 6 min read
The 2025 tax law, the One Big Beautiful Bill Act, gave workers two new federal income tax deductions: one for qualified overtime and one for qualified tips. Workers claim them on their own tax returns.
Employers do the reporting. For 2026 wages, Form W-2 has new codes for overtime, tips and tipped occupations. Here is what counts, what to report, and how to get payroll ready before January.
What Is “No Tax on Overtime and Tips”?
It is two federal income tax deductions in the One Big Beautiful Bill Act, signed July 4, 2025. For 2025 through 2028, workers can deduct up to $12,500 of qualified overtime ($25,000 joint) and up to $25,000 of qualified tips each year.
- Income limits: both deductions phase out above $150,000 of modified AGI ($300,000 for joint filers).
- Who can claim: itemizers and non-itemizers. The worker must put a Social Security number on the return, and married workers must file jointly.
- Who applies it: the worker, on their own return. You do not take the deduction out in payroll. Your job is to report the right numbers.
Do Employers Still Owe FICA on Overtime and Tips?
Yes. The deductions cut federal income tax only. Overtime and reported tips are still subject to Social Security and Medicare tax: 7.65% from the employee and 7.65% from the employer. Your FICA deposits on Form 941 do not change.
For employers with many hourly workers, overtime and tips can be a large share of payroll. The employer FICA bill on those dollars stays the same as before the new law.
What Counts as Qualified Overtime?
Qualified overtime is only the premium part of overtime that the Fair Labor Standards Act (FLSA) requires: the “half” in time-and-a-half for hours over 40 in a workweek. The straight-time part of each overtime hour does not count.
- Example: an employee’s regular rate is $20 an hour and they work 5 overtime hours at $30. Qualified overtime is 5 × $10 = $50, not $150.
- Exempt employees: a worker who is not owed FLSA overtime has no qualified overtime, even if you pay extra for long hours.
- Double time, daily overtime, union contracts: only the half-time premium the FLSA requires counts. The rest is still taxable pay, but not deductible.
- Regular rate: under the FLSA, the regular rate includes nondiscretionary bonuses and other pay for hours worked. If those raise the regular rate, they raise the premium too.
What Counts as Qualified Tips?
Qualified tips are cash tips a customer pays voluntarily to a worker in an occupation on the Treasury list of jobs that customarily received tips on or before December 31, 2024. Tips charged to a card count as cash tips.
- The Treasury list: final regulations issued in April 2026 list more than 70 occupations in eight categories. Each has a three-digit Treasury Tipped Occupation Code.
- Service charges do not count. An automatic 18% charge for large parties is not a qualified tip, even when you pay it out to staff.
- Tip pools can count. Tips shared through a tip-sharing arrangement can still be qualified tips.
- Some employers are excluded. Tips earned working for a specified service trade or business (as defined in section 199A) do not qualify.
Restaurants carry most of this work. See how the numbers look for quick-service restaurant employers.
What Must Employers Report on 2026 Forms W-2?
For 2026 wages, Form W-2 shows qualified overtime in box 12 with code TT, cash tips in box 12 with code TP, and each tipped worker’s Treasury Tipped Occupation Code in box 14b. These W-2s are due to employees and the SSA by February 1, 2027.
| 2026 W-2 field | What goes in it |
|---|---|
| Box 12, code TT | Total qualified overtime: the FLSA premium portion only. Full overtime pay stays in box 1. |
| Box 12, code TP | Total cash tips the employee reported to you |
| Box 14b | Treasury Tipped Occupation Code(s), required when you use code TP. Up to two codes; enter “000” as one code if any tips came from a job not on the list. |
| Box 14a | “Other” items that used to go in box 14 |
| Box 12, code TA | Employer contributions to Trump accounts (a separate new item) |
The codes for each occupation are at IRS.gov/TippedOccupations.
What Was the 2025 Transition Relief?
For tax year 2025 only, IRS Notice 2025-62 waived penalties for not reporting qualified overtime and tips separately, if the W-2 was otherwise complete, correct and on time. The 2025 W-2 form did not change.
The notice covers 2025 only. As of this writing, the IRS has not announced relief for 2026, so plan for full reporting on the W-2s you issue in January 2027. Standard information return penalties apply: $340 per W-2 for a return due in 2027, less if you correct it quickly.
How Should You Prepare Payroll Now?
Start with your payroll provider and your time and point-of-sale systems. December is the last month to fix data before W-2s run.
- Split overtime into a straight-time earnings code and an FLSA premium code.
- Confirm the FLSA status of every job. Exempt roles produce no code TT amount.
- Check that the regular rate includes nondiscretionary bonuses before the premium is calculated.
- Map every tipped job to a Treasury Tipped Occupation Code.
- Keep voluntary tips and mandatory service charges in separate POS and payroll fields.
- Ask your provider to confirm codes TT, TP and box 14b, and review a test W-2.
- Tell employees about the 2026 Form W-4. Step 4(b) lets them account for these deductions in their withholding.
- Keep FICA withholding and Form 941 deposits as they are.
Where Can Employers Still Cut Payroll Taxes?
The new deductions do nothing for employer FICA. A Section 125 cafeteria plan can lower it, because pre-tax benefit elections reduce the wages that are subject to Social Security and Medicare tax. See how Section 125 cuts FICA.
Our Section 125 program is for employers with 50 or more employees. Most employers save $650–$850 per employee per year, and employee take-home pay typically rises about 4–6%. It works alongside your existing health insurance and all major payroll systems, with no setup fee and no minimum contract.
For the full picture, read our Section 125 plan guide for 2026, or see how the program works.
See what a Section 125 plan could save on your payroll taxes.
Get Your Savings Estimate →Frequently Asked Questions
Is overtime pay tax-free in 2026?
No. Overtime is still taxable wages. Workers may deduct the FLSA overtime premium, up to $12,500 ($25,000 on a joint return), on their federal income tax return. Social Security and Medicare tax still apply.
Do employers have to report qualified overtime on the W-2?
Yes, for 2026 wages. Report the FLSA overtime premium in box 12 with code TT on the 2026 Form W-2, which is due to employees and the SSA by February 1, 2027.
What W-2 code is used for tips in 2026?
Box 12, code TP, for the total cash tips the employee reported to you. Box 14b then shows the Treasury Tipped Occupation Code for up to two occupations.
Are mandatory service charges qualified tips?
No. A charge the customer cannot refuse or change, such as an automatic 18% large-party charge, is not a qualified tip, even if you pay it out to staff.
Does the tip deduction lower employer FICA?
No. The deduction is for federal income tax only. Employers still owe Social Security and Medicare tax on reported tips and on all overtime pay.
Sources
The rules and figures on this page come from these sources.
- Overtime and tips provisions: IRS: One Big Beautiful Bill provisions
- 2025 transition relief: IRS Notice 2025-62
- Employer payroll tax rules: IRS Publication 15
This article is general information, not tax or legal advice. Talk to your tax advisor about your situation.