Your 2026 W-2 Has Two New Codes. Are You Ready?

Remember “no tax on tips” and “no tax on overtime”? Great headlines. What they left out is that somebody has to make it work on paper, and that somebody is you. For 2026, it shows up on the W-2 as new codes for overtime and tips, plus a new box that asks exactly what job your tipped employees do.

What’s actually new this year?

The W-2 has new spots for this. New Box 12 codes include Code TT for qualified overtime compensation, Code TP for cash tips reported to the employer and Code TA for qualifying employer contributions to Trump accounts. The TT and TP codes are the ones most of our clients will care about.

There’s a new box for tipped employees too. If you report cash tips with code TP, you must also enter the employee’s three-digit Treasury Tipped Occupation Code (TTOC) in new Box 14b. The IRS put out a list of qualifying jobs, and tips received in an occupation outside that list do not qualify, which makes occupational classification a compliance question rather than a formality.

In other words, “front of house” on an employee profile isn’t going to cut it anymore.

Didn’t this already apply last year?

Sort of. The deductions started with 2025, but employers got a pass on the reporting. For tax year 2025, employers were not required to separately report qualified overtime in W-2 Box 12. The IRS provided transition relief, and that relief is over. The new codes first appear on the 2026 Form W-2 that you furnish to employees in January 2027.

Which means the numbers going on those forms are being built right now, one payroll at a time.

Is all my overtime “qualified overtime”?

No, and this is where a lot of people will get it wrong.

Only the FLSA-required premium, the “half” of time-and-a-half, is qualified overtime. If someone makes $20 an hour, the qualified piece of each overtime hour is the extra $10. Not the whole $30.

A few more catches. Overtime paid to exempt employees doesn’t qualify. So if you throw your salaried manager some extra money for a brutal month, that’s a nice gesture, but it’s not going in Box 12. And overtime paid under state law or a collective bargaining agreement beyond FLSA requirements requires separate analysis.

If your overtime is all lumped into one earnings code, the system can’t tell the difference. Its important to set that up correctly.

Does this mean my employees stop paying tax on tips and overtime?

Not on their paychecks. This one’s going to generate some confused phone calls, so it’s worth getting ahead of.

The 2026 IRS instructions say tips and qualified overtime compensation are still generally subject to federal income tax withholding and both the employer and employee share of Social Security and Medicare. The benefit comes later, when your employee files their tax return and takes a deduction. The deduction is capped at $12,500 for single filers and $25,000 for joint filers for overtime, and tips have their own cap of $25,000.

Your W-2 is how they prove what they’re entitled to. If the numbers are wrong or missing, they’re the ones who feel it.

What should I be doing right now?

If you have tipped employees, make sure your team records every tip employees report, every pay period, and that you’ve tied each tipped employee to the right job. And if you employ a server who also works the door as a coat-check attendant on Friday nights, you’ll need to track both jobs. Both TTOCs go on the W-2.

If you have hourly employees who work overtime, make sure you know which of them are non-exempt under the FLSA, and that you’re paying and coding their overtime the way the rules expect.

And if you’ve been guessing at any of this, now’s the time to say so. It’s a lot easier to clean up in October than in January.

What is APlus doing about it?

We’re working on it with our clients right now. We’re going through how each client has tips and overtime set up in the system, checking occupation assignments, and making sure the right numbers land in the right boxes when W-2s go out.

Some of that we can see and fix on our end. Some of it needs you, because you know who does what on the floor better than any system does. So if we reach out with questions, that’s why.

If you’re an APlus client and want to talk through your setup, contact your friendly CSS. If you’re not with us and nobody’s brought this up with you yet, why not let us help you make it right?

This post is for general education only and isn’t formal tax or legal advice. Talk with your tax professional about your specific situation.