Tips and Overtime Reporting: What Employers Need to Know
For tax year 2025, W-2 and 1099 forms didn't change, and Notice 2025-62 relieves employers of penalties for not separately reporting tips, occupation codes or qualified overtime. For 2026, W-2s report tips in box 12 code TP, the occupation code in box 14b and overtime in box 12 code TT, with new 1099 boxes too.
Your employees may be asking whether their tips and overtime are now "tax-free." The honest answer: they may be able to claim new federal income tax deductions for tax years 2025–2028, and those depend partly on what you report. Here's what the IRS has said about reporting for 2025 and 2026.
Workers can estimate their deductions with our free Tips & Overtime Deduction Calculator. It's a useful link to share with staff.
What are employees able to deduct?
In brief:
- Qualified tips: up to $25,000 per return, for voluntary tips in an occupation that customarily and regularly received tips on or before December 31, 2024 (IRC §224).
- Qualified overtime: up to $12,500 ($25,000 joint) of the overtime premium required by FLSA section 7, which is the amount above the regular rate (IRC §225).
- Both phase out above $150,000 of MAGI ($300,000 joint). Married filing separately can't claim either.
For the full rules, see No Tax on Tips and Overtime (2025–2028): Complete Guide.
Does anything change for payroll taxes?
No. Tips and overtime are still wages for Social Security and Medicare purposes. IRS Publication 15 (2026) confirms that overtime is still subject to Social Security and Medicare tax. The new deductions affect only your employees' federal income tax, which they claim on their own returns (Schedule 1-A). You keep withholding and paying payroll taxes on these wages as before.
What did employers have to report for tax year 2025?
No new form boxes for 2025. The IRS said the 2025 Forms W-2, 1099-NEC, 1099-MISC and 1099-K would not change (IR-2025-82).
Penalty relief under Notice 2025-62. For tax year 2025, the IRS will not impose information-return penalties under IRC §§6721 and 6722 just because an employer or payor did not separately report:
- cash tips,
- the occupation of the person receiving tips, or
- qualified overtime compensation.
The relief is limited to returns and statements for tax year 2025.
Encouraged, not required. Notice 2025-62 encourages employers and payors to give employees the information anyway, through:
- W-2 box 14,
- an online portal, or
- a separate written statement.
Notice 2025-69 explains why this helps. If you report a qualified overtime amount in box 14 or on a separate statement, employees may use that figure directly. Without it, they fall back on "reasonable methods" such as dividing total 1.5x overtime pay by 3, or asking you for the numbers.
What changes on the 2026 forms?
For tax year 2026, the forms have dedicated places for these amounts:
| Form | Qualified tips | Tipped occupation code | Qualified overtime |
|---|---|---|---|
| Form W-2 | Box 12, code TP | Box 14b | Box 12, code TT |
| Form 1099-NEC | Box 1b | Box 1c | Box 1d |
| Form 1099-MISC | Box 13a | Box 13b | Box 14 |
| Form 1099-K | Box 1c | Box 1d | — |
These come from the 2026 Form 1040-ES "What's New" list and the Instructions for Forms 1099-MISC and 1099-NEC (Rev. 12-2026). Check the final 2026 W-2 instructions for field-level details when you set up payroll.
Notice 2025-62 limits its relief to tax year 2025. Don't assume the same relief applies to 2026 forms.
What should your payroll records be able to produce?
The IRS hasn't told employers how to build their systems. But to fill in the 2026 boxes, your payroll records will need to separate some amounts that many systems currently combine:
- Tips by type. Qualified tips (voluntary, amount set by the customer, cash or charged, including tip-sharing for employees) kept apart from mandatory service charges. Service charges are not qualified tips (Pub. 15 (2026)).
- The employee's occupation, so you can report the occupation code. Treasury's proposed list of tipped occupations is in REG-110032-25 (90 FR 45340).
- FLSA overtime premium, kept apart from:
- regular pay for overtime hours,
- any premium above what the FLSA requires (for example, the extra half of double time),
- overtime paid only because of state law, a union contract or company policy.
- Each employee's FLSA status. Exempt employees have no qualified overtime.
The overtime split is often the hardest part. A single "OT" pay-stub line usually combines the regular rate and the premium. With double time or state-required daily overtime, only part of that line is FLSA-required premium. Our post on what counts as qualified overtime walks through the math.
What about the SSTB question?
Tips received in a specified service trade or business (SSTB, as defined in IRC §199A(d)(2)) don't qualify. For employees, the test looks at the employer's business. Notice 2025-69 recognises that many employers, a significant number of them small businesses, have never had to decide whether they're an SSTB.
So the IRS set a transition period. Until January 1 of the first calendar year after final SSTB regulations are issued, it will treat tips received in a listed tipped occupation as not received in an SSTB. Treasury and the IRS have said they intend to propose regulations and ask for comments first. If you aren't sure whether your business could be an SSTB, keep an eye on that guidance and ask your adviser.
Do independent contractors who get tips need anything from you?
If you pay contractors and report their payments on Form 1099-NEC or 1099-MISC, the 2026 forms have new boxes for tips, occupation codes and overtime (see the table above). Platforms and processors that issue 1099-Ks have tips and occupation boxes too. Separately, the Form 1099-NEC threshold changed to $2,000 for payments made in 2026. Our 1099 Filing Checker covers that rule.
A short employer checklist
| Step | Why it matters |
|---|---|
| Separate qualified tips from service charges in your POS and payroll | Only voluntary tips are qualified |
| Record each tipped employee's occupation | Needed for W-2 box 14b (2026) |
| Confirm each employee's FLSA status | Exempt employees have no qualified overtime |
| Split overtime into regular rate, FLSA premium and any extra premium | Only the FLSA premium goes in box 12 code TT |
| Test your payroll software's support for codes TP and TT | So your 2026 W-2s are right the first time |
| Tell employees how you'll report the amounts | Fewer questions at tax time |
How can RAHA help?
RAHA Financials offers Payroll Setup for Tips & Overtime Reporting. It's a fixed-price service, quoted upfront. It includes a review of how your payroll system tracks tips and FLSA overtime, setup so qualified amounts are reported separately to employees, ongoing payroll processing and a year-end W-2 review. Request a consultation, or see our payroll processing and hospitality pages.
Frequently asked questions
Do employers still withhold Social Security and Medicare tax on tips and overtime?
Yes. The deductions don't change payroll taxes. Pub. 15 (2026) confirms that overtime remains subject to Social Security and Medicare tax.
Were employers penalised for not reporting tips and overtime separately for 2025?
Notice 2025-62 says the IRS will not impose §6721 or §6722 penalties for tax year 2025 for not separately reporting cash tips, occupation codes or qualified overtime.
Where does qualified overtime go on the 2026 W-2?
Box 12, code TT. Qualified tips go in box 12 with code TP, and the occupation code goes in box 14b.
Should I report the full overtime pay in code TT?
No. Qualified overtime is only the FLSA-required premium above the regular rate. Regular pay for overtime hours and any premium beyond what the FLSA requires don't qualify.
Are mandatory service charges reported as qualified tips?
No. Mandatory service charges are not qualified tips.
Do I decide whether my employees can claim the deduction?
No. Employees claim the deductions on their own returns and must meet their own eligibility tests. Your job is to report accurate amounts.
Sources
- IRS Notice 2025-62 (2025 penalty relief): https://www.irs.gov/pub/irs-drop/n-25-62.pdf
- IRS Notice 2025-69 (reasonable methods; SSTB transition): https://www.irs.gov/pub/irs-drop/n-25-69.pdf
- IRS Publication 15 (2026), Employer's Tax Guide: https://www.irs.gov/pub/irs-pdf/p15.pdf
- 2026 Form 1040-ES: https://www.irs.gov/pub/irs-pdf/f1040es.pdf
- Instructions for Forms 1099-MISC and 1099-NEC: https://www.irs.gov/pub/irs-pdf/i1099mec.pdf
- IRC §224: https://www.law.cornell.edu/uscode/text/26/224
- IRC §225: https://www.law.cornell.edu/uscode/text/26/225
This guide provides general information for educational purposes and is not tax, legal or accounting advice. Consult a qualified professional before acting.
