The federal deductions for qualified tips and qualified overtime created a new job for employers: reporting those amounts separately so employees can claim them. For tax year 2026, that reporting is baked into a redesigned Form W-2, and payroll systems and processes need to be ready before year-end.
This is general information, not individual tax advice — the right treatment depends on your specific situation.
Background: The Deductions That Started This
The One Big Beautiful Bill Act created above-the-line deductions for qualified tips and qualified overtime for eligible employees, subject to income limits and other conditions. Our earlier article covers the employee side — who qualifies and how the deduction works. This piece is about the employer's reporting obligation.
The 2026 Form W-2 Changes
The IRS finalized a 2026 Form W-2 with new fields. Box 12 gains new codes: TP for total cash tips reported to the employer, TT for total qualified overtime compensation, and TA for employer contributions to a so-called Trump account. Box 14 is split, with Box 14b used to report up to two Treasury-issued tipped-occupation codes that indicate whether a role is in an occupation that customarily receives tips. Employees need these figures to claim the deductions on their returns.
"Qualified Overtime" Means the Premium, Not the Whole Check
This is the detail most likely to be reported wrong. Qualified overtime compensation is only the extra half-time premium required by the Fair Labor Standards Act — the "half" in time-and-a-half — not the full amount paid for overtime hours. If someone's regular rate is $40 and they work overtime at $60, only the $20 premium per hour is qualified overtime. Your payroll system has to isolate that premium component, which many were not previously configured to break out.
2025 Was a Transition Year
For 2025, the IRS provided penalty relief and told employers they could report qualified overtime by any reasonable method — Box 14, an online portal, or a written statement to employees — because the new Box 12 code was not yet on the form. That grace period does not carry into 2026: separate reporting using the new codes is expected on the 2026 W-2s you furnish to employees and file with the Social Security Administration by the early-2027 deadline.
What Employers Must Do Now
Confirm your payroll provider has implemented the 2026 W-2 changes. Make sure overtime is calculated in a way that isolates the FLSA premium — contractual overtime you pay above what the FLSA requires, such as time-and-a-half after 8 hours in a day, does not count as qualified overtime and should not be swept into the reported figure. Identify which of your positions map to Treasury tipped-occupation codes and record them. Decide how you will capture employee-reported tips consistently. And plan a short communication to staff so they understand what the new boxes mean when they receive their W-2.
Also think about withholding. The deductions are claimed on the employee's return, but employees may update their Form W-4 to account for the expected deduction, and the IRS has issued updated withholding guidance. Payroll should be ready for W-4 changes in the first quarter and able to explain to employees why their forms now show a tips or overtime figure that was not there before.
The Old Payroll Rules Still Apply
None of this changes the underlying payroll-tax treatment. Tips are still wages subject to Social Security and Medicare tax and to income-tax withholding, employees must still report tips to you, and large food-and-beverage establishments still have their existing tip-reporting and allocation obligations. The deductions are claimed by the employee on their return; your job is accurate, separate reporting.
How VarStan Helps
We make sure clients' payroll systems are configured for the 2026 W-2, that overtime premiums and tips are captured correctly through the year, and that year-end filings are right the first time. If you employ tipped or hourly staff, this is worth reviewing before the fourth quarter.