If you employ tipped or hourly staff, the 2026 payroll year brings big changes to overtime reporting. Draft 2026 General Instructions for Forms W‑2/W‑3 introduce new overtime reporting lines for tips and overtime. Employees who qualify may use Schedule 1‑A (Form 1040) to claim the temporary deductions created by the One, Big, Beautiful Bill (OBBBA). Here’s what changes and how to prepare.
What changes on the Form W‑2 for 2026 wages
- Box 12: Two new codes apply. Code TP reports the total amount of cash tips reported to the employer. Code TT reports the total amount of qualified overtime compensation paid during the year (the premium portion above the regular rate under FLSA).
- Box 14b (new): The Treasury Tipped Occupation Code(s) must be reported for tipped workers. Up to two codes may be entered; if any tips were received in a nonqualifying occupation, “000” must be included as one of the codes (per draft W‑2 instructions).
- Payroll taxes still apply: both qualified tips and qualified overtime remain subject to Social Security and Medicare taxes when applicable (per the draft instructions).
Transition: 2025 vs. 2026 overtime reporting
The OBBBA deductions for tips and overtime are in effect for 2025–2028. For 2025 returns, IRS guidance allows the amounts to be furnished on a Form W‑2, on another statement to the individual, or reported directly by the individual when needed. Beginning with 2026 wages (W‑2s issued in early 2027), the redesigned W‑2 adds the specific TP/TT and Box 14b fields to standardize reporting.
What counts as “qualified tips” and “qualified overtime”?
- Qualified tips: the IRS/Treasury proposed rules identify occupations that “customarily and regularly” received tips on or before Dec. 31, 2024, and define qualified tips for deduction purposes (voluntary tips; service charges don’t qualify).
- Qualified overtime: the draft W‑2 instructions define “qualified overtime” as the portion required by the FLSA that exceeds the regular rate of pay (the premium part of time‑and‑a‑half).
Employer checklist to prepare for 2026
- Update payroll and timekeeping systems to capture **cash tips reported to the employer** and the **premium portion of overtime** separately.
- Map new W‑2 outputs: Box 12 code **TP** (cash tips), Box 12 code **TT** (qualified overtime), and **Box 14b** for the Treasury Tipped Occupation Code(s).
- Add fields/workflows to record up to **two** occupation codes per employee for tipped work; include “000” if any tips were in a nonqualifying occupation (per draft instructions).
- Revise written policies to describe how tips are reported and how overtime premiums are calculated and recorded.
- Train managers/payroll on 2025 transition guidance vs. 2026 W‑2 changes.
- Communicate with employees: provide year‑end statements summarizing tips and the overtime premium portion for 2025; explain that starting with 2026 wages, they’ll see **TP/TT** and **Box 14b** on W‑2s.
- Coordinate with your tax advisor on how these figures flow to **Schedule 1‑A** for employees who qualify for the deductions.
For employees: how these entries help at tax time
The new W‑2 entries don’t automatically change take‑home pay; they document amounts employees may use when claiming deductions on Schedule 1‑A. Taxpayers still need to meet income phase‑outs and other requirements in the law.
How Archer Lewis can help
Archer Lewis can get your 2026 payroll ready end‑to‑end. We’ll tune your payroll and timekeeping setup to capture cash tips (TP), the premium portion of overtime (TT), and the new Box 14b occupation codes—then test W‑2 outputs so January 2027 forms are clean. We’ll also draft employee communications and a manager checklist for 2025 transition reporting, and coordinate with your tax preparer so eligible employees can use Schedule 1‑A correctly at filing time. Reach out to one of our specialists now so you can get the help you need with overtime reporting.