No Tax on Tips & Overtime: What’s Final for 2026

When the One Big Beautiful Bill Act passed in mid-2025, it introduced two new deductions — “no tax on tips” and “no tax on overtime.” The rules have evolved since then. As of this year, the IRS has finalized the details, the 2026 W-2 form, and the list of qualifying occupations. Here’s where things stand.

The key point for business owners: While these deductions are claimed by eligible workers, employers have new payroll and reporting responsibilities for 2026. If you have tipped or overtime-eligible employees, now is the time to make sure your payroll systems are set up to track and report the required information correctly.

What Employers Should Know About No Tax on Tips and Overtime:

• Both the “no tax on tips” and “no tax on overtime” deductions are retroactive to 1/1/2025 and expire 12/31/2028.
• Tips and overtime remain subject to Social Security and Medicare taxes for both employer and employee — this is an income tax deduction, not a payroll tax exemption.
• Tips must be voluntary — not service charges. A tip only counts if the customer decides the amount; mandatory service charges or automatic gratuities don’t qualify for the deduction.
• The overtime deduction covers only the “half-time” premium portion, not straight-time pay.
• Married taxpayers must file jointly to claim either deduction.

Final 2026 Rules for Tips, Overtime, and W-2 Reporting

• Tips deduction: up to $25,000, phasing out starting at $150,000 MAGI (single) / $300,000 (joint), fully gone at $400,000/$550,000.
• Overtime deduction: up to $12,500 single / $25,000 joint, same phase-out thresholds as the tips deduction.
• Qualifying occupations are now a closed, final list: Over 70 job types across food service, hospitality, personal care, and similar fields are included — each with its own Treasury Tipped Occupation Code (TTOC).
• Owners who receive tips do not qualify: If you (or anyone with a 5%+ ownership stake) receive a “tip,” the IRS treats it as something other than a qualified tip. This applies regardless of industry — so an owner/chef or owner/bartender taking tips at the counter is excluded even though their staff isn’t.
• The 2026 W-2 has new boxes: These are effective for wages paid in 2026 (the form you’ll issue in early 2027):
  • Box 12, Code TP — total qualified tips
  • Box 12, Code TT — total qualified overtime
  • Box 14 splits into 14a (everything that used to go in Box 14) and 14b (the employee’s Treasury Tipped Occupation Code)

What this means for businesses now:

• If you have tipped or overtime-eligible employees, confirm with your payroll provider that their system can capture qualified tips and overtime separately, and can assign the correct TTOC for 2026.
• If you’re an owner who also works the floor or the line and takes tips, don’t count on this deduction for yourself.
• Keep good records now — the systems side of this is what will save you headaches at year-end.

This is general information, not tax advice for your specific situation — If you’d like help determining what these new rules mean for your business, schedule a strategy session with us.