Your employees have heard that overtime and tips are no longer taxed. Their paychecks say otherwise, and in January they will open a W-2 with three codes on it that did not exist last year. Whether they can claim the deduction depends on those codes being right. The IRS has said that for 2026 the deduction is limited to what the W-2 reports, and an understated code means a corrected W-2 before the employee can claim it (FS-2026-13, the IRS’s qualified-overtime FAQ, updated August 6, 2026). This guide covers each code, which pay belongs in it, how to set it up in Paylocity, and how to reconcile the totals before the forms go out.
At a glance: the 2026 Form W-2 codes for tips and overtime
- Box 12, code TT: qualified overtime compensation, the premium portion of overtime the Fair Labor Standards Act (FLSA) requires, which is the extra half of time-and-a-half.
- Box 12, code TP: the total cash tips an employee reported to the employer during the year.
- Box 12, code TA: employer contributions to an employee’s Trump account under Section 128.
- Box 14b: up to two Treasury Tipped Occupation Codes for the job or jobs the tips came from, reported only when code TP is reported.
Paylocity’s own compliance alert, IRS Publishes Revised 2026 Fact Sheet for Qualified Compensation (August 31, 2026), lists the same changes from the vendor’s side. The sections below go through each one and the setting behind it.
2026 Form W-2
Three new Box 12 codes, and an occupation code that appears only when TP does
Box 14 is split in two for 2026. The new Box 14b is filled only for an employee who has an amount under code TP.
Box 12
- TTQualified overtime compensation. The FLSA premium only, the extra half of time-and-a-half.
- TPCash tips reported to the employer. Voluntary tips, including tip-sharing. Not service charges.
- TAEmployer Trump account contributions under a Section 128 program.
Box 14
14a Other
What used to be Box 14: state disability, union dues and the rest.
14b Treasury Tipped Occupation Code(s)
Up to two codes for the jobs the tips came from. Filled only when TP is reported. 000 as one of the codes if any tips came from a job not on the IRS list.
An amount under TP is what triggers Box 14b. No TP, no occupation code.
Source: IRS, 2026 General Instructions for Forms W-2 and W-3 (What’s New; Box 12 codes TA, TP, TT; Box 14b).
What Changed on the 2026 Form W-2
The 2026 Form W-2 is the first one that carries the no-tax-on-tips and no-tax-on-overtime deductions as employer-reported amounts. The One Big Beautiful Bill Act created both deductions for tax years 2025 through 2028, or in the words of the IRS’s 2026 General Instructions for Forms W-2 and W-3, “tax years beginning after 2024 and ending before 2029.” For 2025 wages the IRS allowed transition relief. Under Notice 2025-69, employers could report qualified overtime and tips in Box 14 or on a separate statement, or not at all, and an employee without a figure from the employer could work one out by a reasonable method. For 2026 wages that relief is gone. The amounts go in Box 12, with the new codes, on the W-2 the employee uses to file.
Three codes join Box 12: TT for qualified overtime, TP for reported cash tips, and TA for Trump account contributions. Box 14 splits in two. Box 14a is the familiar free-text box for state disability insurance, union dues and the rest. Box 14b holds the Treasury Tipped Occupation Codes for a tipped employee and is filled only when TP is reported. Every rule in this guide comes from the 2026 General Instructions and the IRS’s qualified-overtime fact sheet FS-2026-13, updated August 6, 2026.
In Paylocity. The year-end W-2 setup is where earnings codes map to W-2 boxes. The next three sections each end with the mapping they need, and the occupation code is an employee-record field rather than a mapping. If your year-end checklist was written before 2026, none of those four items is on it. Paylocity’s own alert on the August 6 fact sheet points clients to two resources in its PEAK knowledge base for the configuration: “Identify and Configure Earning Codes for OB3 2026 Reporting” and “System Updates to Support OB3” (OB3 is Paylocity’s shorthand for the One Big Beautiful Bill Act). The same alert asks employers to review their payroll and year-end processes “to support separate reporting of qualified overtime compensation on Form W-2.”
Code TT: Which Overtime Qualifies and Which Does Not
Qualified overtime compensation is the overtime pay the FLSA requires, and only the part above the regular rate. The instructions put it in one line: “only the ‘half’ portion of ‘time-and-a-half’ compensation would be reported using code TT.” An employee paid $20 an hour earns $30 for an overtime hour. The $20 is straight time and stays out of TT. The $10 premium is what the code reports. Across a year, TT is the sum of those premiums for FLSA-required overtime hours. The IRS states it as a weekly formula: FLSA hours over 40 in the workweek, times one-half, times the employee’s FLSA regular rate. The regular rate is not always the hourly rate. Under the FLSA it includes all pay for the week except a short list of exclusions, so shift differentials and nondiscretionary bonuses raise it, and the premium with it.
Box 12, code TT
Of a $30 overtime hour, only the $10 FLSA premium goes in code TT
The IRS formula for most employees: FLSA hours over 40 in the workweek × one-half × the regular rate. Example at a $20 regular rate.
Goes in TT
- The premium half of FLSA-required overtime, for hours over 40 in the workweek
- Paid to employees who are not exempt from the FLSA
- Computed on the FLSA regular rate, which includes shift differentials and nondiscretionary bonuses
- Of a higher premium (double time), only the half the FLSA requires
Stays out
- The straight-time part of every overtime hour
- Overtime paid to employees exempt from the FLSA
- Overtime a state or a contract requires beyond the FLSA (daily overtime, weekend premiums)
- The part of double time above the FLSA half
Source: IRS, 2026 General Instructions for Forms W-2 and W-3 (code TT); IRS FS-2026-13, Q1, Q12, Q15, Q16 (updated August 6, 2026).
That definition does the sorting. Overtime your state requires but the FLSA does not, such as daily overtime after eight hours, does not qualify. The FAQ says it plainly: “overtime compensation not required by the FLSA is not eligible for the deduction.” Neither does overtime a contract or union agreement adds beyond federal law, or overtime paid to an employee who is exempt from the FLSA. An employer that pays double time on Sundays reports the FLSA half, not the doubled amount, because “only the amount minimally necessary to satisfy” the FLSA counts.
The paycheck does not change by itself. Qualified overtime is still wages, and withholding, Social Security and Medicare apply to it as they did in 2025. The deduction is taken on Schedule 1-A of the employee’s Form 1040, using the TT amount from the W-2. The code reports; it does not exempt.
In Paylocity. Set up an earnings code that carries only the FLSA overtime premium, separate from the straight-time hours and from any overtime a state or a contract requires on top of federal law. Assign it to non-exempt employees only, and map that code alone to Box 12 TT in the year-end setup. Employees with more than one pay rate in a week are the hard case. Their FLSA premium is half of a weighted-average regular rate, so the code has to receive that calculated premium, not half of whichever rate the overtime hours landed on. Run one payroll register after the change and confirm that an exempt employee shows nothing on the new code.
Code TP and Box 14b: Reported Tips and the Tipped Occupation Code
Code TP reports the total cash tips an employee reported to the employer during the year. The word that matters is reported. Cash and charged tips a customer leaves voluntarily, and tips an employee receives through a tip-sharing arrangement, are what the code carries, as long as the employee reported them to you. A mandatory service charge added to the bill is not a qualified tip, so an automatic gratuity on a large party’s check stays out of TP.
Box 14b is the second half of the tips entry. For every employee with an amount in TP, the W-2 carries at least one Treasury Tipped Occupation Code in Box 14b. The IRS publishes the list of 71 occupations that qualify, in eight groups, food service and transportation among them, each with a three-digit Treasury Tipped Occupation Code. The box holds up to two codes, one per occupation the employee earned tips in; an employee who tipped in three or more occupations gets any two of them. If any of the tips came from an occupation that is not on the list, 000 goes in as one of the two codes. The box is blank when there is no TP.
Box 12, code TP · Box 14b
A reported voluntary tip goes to code TP; a service charge goes nowhere
Two questions decide the tips entries on each employee’s 2026 W-2. Read down the left column.
Was it a voluntary tip from a customer or a tip-sharing arrangement, and did the employee report it to you?
No
A mandatory service charge or automatic gratuity is not a qualified tip. Nothing under TP, nothing in Box 14b.
Yes
Report the year’s total under Box 12, code TP. Payroll taxes on the tips are unchanged.
For every employee with TP: is each job the tips came from on the IRS list of 71 tipped occupations?
Yes
Enter that occupation’s three-digit code in Box 14b, up to two codes. Three or more jobs: any two.
Not all of them
Enter 000 as one of the two codes whenever any of the tips came from a job that is not on the list.
Source: IRS, 2026 General Instructions for Forms W-2 and W-3 (qualified tips; code TP; Box 14b); IRS list of occupations that customarily and regularly received tips on or before Dec. 31, 2024.
The occupation code is not a payroll calculation. It is a fact about each employee’s job that someone looks up, enters and keeps current when the job changes.
In Paylocity. Confirm that the earnings code for reported tips maps to Box 12 TP and that service charges and automatic gratuities run through a separate code that does not. Then treat the occupation code as an employee-record field. Assign the code for each tipped occupation, up to two, from the IRS list, and enter 000 as one of them where any tips came from a job that does not qualify. Add the lookup to your new-hire and job-change steps. Otherwise a server who moves to the kitchen carries the wrong code into next year’s W-2. One report before year-end should list every employee with tip earnings beside the code on file. A blank is a finding.
Code TA: Employer Contributions to Trump Accounts
Code TA is the third new Box 12 code, and an employer that makes no Trump account contributions has nothing to put in it. It reports employer contributions to an employee’s Trump account under Section 128 of the Internal Revenue Code. The accounts are a new type of traditional IRA for a child under 18, and the program opened on July 4, 2026; Paylocity’s July 6, 2026 alert covers what it means for a benefits program. An employer may contribute up to $2,500 a year toward the account’s $5,000 annual limit, and the contribution is excluded from the employee’s gross income when it is paid through a Trump account contribution program. Both figures are indexed for inflation after 2027. Publication 15-A carries the program rules.
In Paylocity. If you make these contributions, set up a contribution code that maps to TA and is excluded from the employee’s gross income. If you do not, the section ends here.
Reconcile TT and TP Before the W-2s Issue
For 2026, the IRS has said that “employees may not consider any amount of qualified overtime compensation in excess of what is reported on Form(s) W-2, box 12, code TT.” An employee whose W-2 omits or understates qualified overtime has to obtain a corrected Form W-2c before claiming the full amount. A short TT is not a rounding error the employee fixes on the return. It is a correction you file, in the first quarter, one employee at a time. The IRS’s own FAQ adds that an employer who finds an error in code TT must file a W-2c with the Social Security Administration (SSA) and furnish it to the employee “as soon as possible,” and that an incorrect W-2 can draw information-return penalties, reduced for timely corrections. For 2026 forms those penalties run $60 per form corrected within 30 days of the due date, $130 by August 1, and $340 after that.
The reconciliation decides how your January goes. Run the W-2 preview before the final 2026 payroll, not after it, and compare three totals.
- The TT total on the preview against the year-to-date on the premium-only overtime code in the payroll register. They should match to the cent. A gap means hours posted to a different overtime code, or a premium that landed on the wrong code for a multi-rate employee.
- The TP total against the reported-tips year-to-date. A gap usually means a service-charge code mapped to TP, or tips paid out but never reported.
- Box 14b against the list of employees with TP. Every employee with TP has a code; every employee without TP has a blank.
Then two scans. An exempt employee with an amount in TT has an earnings code that should not be assigned. An employee whose TT equals their total overtime pay, not half of it, has a code carrying straight time. An overstated TT is a correction too. The IRS says an employee may count only the qualified overtime actually paid, so a W-2 that reports double the true premium still has to be corrected, and it exposes the employer to the same penalties as an understatement.
In Paylocity. The W-2 preview and the payroll register by earnings code are the two reports this comparison needs, and both live in the payroll module. Fix the code assignment or the mapping, rerun the preview, and compare again. After the forms are filed the only path is a W-2c, which is why the preview runs before the last payroll.
What to Tell Employees About Their Paychecks and Their W-2
Employees ask two questions first. How does no tax on overtime work, and will my tips still be taxed on my paycheck? The IRS answers both for employees on its no tax on overtime and no tax on tips pages. Here is the answer to forward.
Nothing changes on the paycheck unless the employee asks for it. Payroll keeps withholding on overtime and tips as before, and the IRS says an employer may not reduce withholding for the deduction on its own. An employee who wants the deduction reflected in take-home pay now files a new 2026 Form W-4 and uses step 4(b), which was updated for it.
The deduction is claimed at filing, on Schedule 1-A of the 2026 Form 1040, using the amounts the W-2 shows in Box 12 under codes TT and TP. It is capped: up to $12,500 of qualified overtime ($25,000 on a joint return) and up to $25,000 of qualified tips, and it phases out once modified adjusted gross income passes $150,000 ($300,000 joint). The employee needs a Social Security number valid for employment, and a married employee has to file jointly to claim it. The caps apply to 2025 through 2028 and are not indexed. And the W-2 is the document that counts: an employee who thinks an amount is missing should ask payroll for a corrected W-2, not estimate it on the return.
In Paylocity. Two settings make the January questions shorter. Employee self-service gives each person their W-2 the day it is issued, provided the employee has opted in to paperless forms before the W-2s are generated; Paylocity’s year-end resources page asks administrators to opt in and to encourage employees to do the same. The same page points to Paylocity’s integrations with TurboTax, TaxAct and H&R Block for importing W-2s. Put that sentence in the employee notice, so the TT and TP amounts reach the return without retyping.
Chicago Tipped Employers: What to Configure Now
Chicago tipped employers have two settings that touch code TP: the tip credit, and the occupation code from the section above. Chicago’s minimum wage ordinance sets a lower cash wage for tipped employees and lets the employer count tips toward the difference. On May 20, 2026 the City Council passed substitute ordinance SO2026-0024043, which holds the allowance at 24 percent of the minimum wage through June 30, 2028 and then phases it out by employer size: employers with 21 or more employees lose the allowance on July 1, 2030, and employers with more than 3 but fewer than 21 employees lose it on July 1, 2033, each through yearly steps the ordinance spells out.
The tip credit makes the tipped cash wage and the tips that complete the minimum two different earnings, and the W-2 code reports only one of them. The tip credit also changes code TT for the same employee. Under the federal regulation, a tipped employee’s regular rate for overtime includes the tip credit the employer takes, so the FLSA premium is half of the full rate, not half of the cash wage. An overtime code that computes the premium on the cash wage understates TT for every tipped employee who works past 40 hours. The Chicago rates change each July 1, so they live in our numbers guide. The Illinois laws that take effect the same January are in our Illinois employment laws guide.
In Paylocity. Confirm the tipped cash wage runs on its own earnings code at the Chicago rate, that reported tips run on the code mapped to TP, and that the tip-credit calculation uses the two together to reach the minimum each pay period. Then confirm the overtime premium for tipped employees is computed on the regular rate that includes the credit, not on the cash-wage earnings code alone, and check the occupation code on every tipped employee’s record. That is the whole Chicago-specific list for this W-2.
What to Do Before Your First 2027 Payroll
Work the list in this order.
Now.
- Give the FLSA premium half its own earnings code, assigned to non-exempt employees only, mapped to TT.
- Separate reported tips from service charges and automatic gratuities; map only reported tips to TP.
- Look up a Treasury Tipped Occupation Code for every tipped employee, up to two per employee, with 000 as one of them if any tips came from a job that is not on the list, and make the lookup part of onboarding and job changes.
- Set up a TA contribution code only if you make Trump account contributions.
Before the final 2026 payroll.
- Run the W-2 preview and reconcile TT to the premium code, TP to reported tips, and 14b to the TP list.
- Scan for exempt employees with TT and for TT amounts that equal total overtime.
- Confirm paperless W-2 opt-ins and send the employee notice.
January.
- File the W-2s with the SSA and furnish them to employees by February 1, 2027 (January 31 is a Sunday), then keep the reconciled preview and register with the year-end records so a correction request can be answered from them.
The year-end items these codes do not change, from the employee data audit to the first-payroll checks, are in our year-end checklist.
Summary
The 2026 Form W-2 carries three new Box 12 codes: TT for the FLSA overtime premium, TP for reported cash tips, and TA for Trump account contributions, with up to two Treasury Tipped Occupation Codes in Box 14b whenever TP is reported. The paycheck does not change unless the employee files a new W-4. The W-2 is where the deduction lives, and for 2026 it can be no larger than the amount the form shows. Chicago tipped employers add the tip-credit configuration and nothing else.
If you would rather have a second set of eyes on the earnings-code split and the preview before the last payroll of the year, we will go through both with you. Schedule a free consultation, or see how managed payroll handles the year-end work.
FAQ: 2026 W-2 Codes TT and TP
What is code TT on a 2026 W-2?
Code TT in Box 12 of the 2026 Form W-2 reports qualified overtime compensation: the premium portion of overtime pay that the Fair Labor Standards Act requires, which the employee uses to claim the no-tax-on-overtime deduction. Under the IRS’s 2025 transition relief in Notice 2025-69, the same amount could appear in Box 14 or on a separate statement; for 2026 only Box 12 code TT counts.
Does qualified overtime change what comes out of an employee’s paycheck?
No, unless the employee files a new Form W-4. The 2026 W-4 has a step 4(b) entry for the expected qualified-overtime deduction, and the IRS says its Tax Withholding Estimator was updated for it as well; without a new W-4, payroll withholds on overtime as before. The deduction is claimed at filing, on Schedule 1-A of the 2026 Form 1040, from the W-2 amounts. Payroll taxes on overtime and tips are unchanged, so an employee who leaves the W-4 alone sees no change until the return is filed.
What happens if the overtime or tips are missing from the W-2?
The fix is the employer’s, not the employee’s. A corrected Form W-2c is filed by the employer with the Social Security Administration and furnished to the employee as soon as possible, and the employee claims the deduction from the corrected amount. An employee cannot route around a missing W-2c with Form 4852, the substitute W-2; the IRS says that form does not satisfy the separate-reporting requirement. Reconciling the W-2 preview before the final payroll is how most of those corrections are avoided.
Do employers still pay taxes on tips?
Yes. The no-tax-on-tips deduction belongs to the employee and is claimed on the employee’s return. The instructions say tips are “still generally subject to federal income tax withholding and both the employer share and employee share of social security tax and Medicare tax if the tips received are $20 or more per month.” The employer’s share is unchanged by the deduction.
This article is general information, not legal or tax advice. For your specific situation, consult a qualified professional.