New “No Tax on Overtime & Tips” Payroll Reporting Requirements Effective January 1, 2026
Recent changes under the One Big Beautiful Bill Act’s “no tax on overtime and tips” provisions have raised many questions for employers as they prepare for 2026 payroll reporting. To help you stay compliant and avoid costly errors, we’ve summarized the key actions your business needs to take now.
Continue Withholding All Taxes. Do Not Stop Withholding.
Despite its name, the new provision does not eliminate payroll withholding for overtime or tips. Employers must continue to withhold all federal, Federal Insurance Contributions Act (FICA) and applicable state taxes on all wages, including overtime and tips, based on each employee’s Form W‑4.
This has been the primary area of confusion, so please ensure your team and employees understand that withholding requirements have not changed.
Distribute and Implement the New 2026 Form W‑4.
The IRS has issued a revised Form W‑4 for 2026 that includes a new worksheet for employees who expect overtime pay and/or receive tips.
Employers should provide the updated 2026 Form W‑4 to all employees. Encourage employees who regularly receive tips or overtime to complete the new worksheet to estimate their appropriate withholding.
Update Payroll Systems To Track Qualified Overtime (NEW W‑2 Code TT).
Beginning in 2026, employers must track qualified overtime separately so it can be reported with a new Form W‑2 Box 12 code TT. Qualified overtime includes only overtime paid under FLSA overtime rules. Overtime paid outside of FLSA guidelines does not qualify and must be tracked separately.
Update Payroll Systems To Track Qualified Tips (NEW W‑2 Code TP).
A new Form W‑2 Box 12 code TP will be required for qualified tips. To qualify, tips must be:
- Voluntary payments (cash, check, credit/debit, EFT)
- Customary for the occupation
- Not mandatory service charges
- Not paid by an employer or entity in which the employee has an ownership interest
For example, credit card tips voluntarily left by customers would qualify. Mandatory 20% service charges automatically added to large parties (which must be tracked separately) would not.
Implement Required Payroll Software Changes.
Your payroll system must be updated to properly track qualified overtime (Form W‑2 code TT), qualified tips (Form W‑2 code TP) and nonqualified overtime and tips (separate tracking categories).
For QuickBooks Desktop and QuickBooks Online users, Intuit has released setup guidance for overtime tracking and tip tracking. If you use a different payroll provider, please contact your payroll provider promptly to confirm:
- New 2026 tracking categories are available
- Form W‑2 codes TT and TP will be correctly supported
- Reporting will meet IRS and DOL requirements
Learn More About Complying With Your Payroll Reporting Requirements
To learn more about how your specific organization should be implementing these payroll reporting requirements, contact your Warren Averett advisor.
