For years, the W-2 was reliable, predictable, and pleasantly unsurprising. But if you process payroll or handle W-2s, it’s time to prepare yourself – because 2026 is going to look a lot different.
Starting with tax year 2026, employers are required to separately report qualified tips and qualified overtime compensation on Form W-2. And in case you missed it, these aren’t “nice-to-have” disclosures anymore. They’re mandatory, they’re meaningful, and they come with brand-new Box 12 codes.
Back in 2025, the One Big Beautiful Bill Act (OBBBA) created new tax deductions for employees. And whenever Congress creates a new deduction, the IRS needs a way to verify it. Since that verification will now be happening on Form W-2, employers across the country are officially a part of the process.
The bottom line? If employees can deduct it, employers must report it. This isn’t just a tax law change; it’s a reportingchange that employers must implement immediately.
Why It’s Happening
The OBBBA introduced two new employee deductions: one for qualified overtime compensation and one for qualified tips.
To make those deductions work, the IRS needs to see the numbers directly on the W-2. So amounts that used to live quietly inside payroll systems now have to be broken out and reported separately.
What 2025 Looked Like (And Why It Was Easier)
In 2025, the IRS gave employers a break. There were no new W-2 codes yet, and employers weren’t penalized if they didn’t separately report qualified tips or overtime. Some companies continued business as usual, while others disclosed the information in Box 14 or on a separate statement. Last year, compliance was optional, giving employers time to prepare, adapt, and adjust.
As of now, that grace period is over.
What Changes in 2026
For 2026, the IRS has finalized the new rules, and they’re no longer flexible.
Form W-2 now includes two new Box 12 codes: Code TP for total qualified tips and Code TT for total qualified overtime compensation. Employers must calculate these amounts and include them on every applicable W-2.
Need a quick breakdown? Qualified tips include cash or charged tips that employees report to their employer and that are already part of taxable wages. Starting in 2026, those totals must be reported under Code TP.
On the other hand, qualified overtime compensation isn’t quite as straightforward as it seems. The big caveat here is that qualified overtime compensation does not mean total overtime pay. Instead, it only includes the overtime premium required under the Fair Labor Standards Act. So, if an employee earns $20 an hour and $30 an hour for overtime, the qualified overtime amount is the extra $10, not the full $30. That $10 is what employers must report under Code TT.
An Unexpected Detail: Occupation Codes
There’s one more important detail that’s all too easy to miss. The IRS has reworked Box 14, splitting it into two fields. One of those new fields is used to report tipped occupation codes.
If you’re wondering why that’s important, the simple explanation is this: the IRS will use these occupation codes to determine whether an employee’s tips qualify for the new deduction. If an employer reports only Occupation Code “000”, the IRS will deem those tips ineligible.
What Employers Should Be Doing Now
If these sound like big changes, that’s because they are! To keep up with these changes and ensure ongoing compliance, payroll systems will need to:
- Separately track the FLSA overtime premium
- Capture employee-reported tips
- Output the new Box 12 codes and Box 14 occupation data
In addition, employers should prepare for a bit of confusion regarding these new changes. Employees will soon see unfamiliar codes on their W-2s in 2026, which is sure to raise plenty of questions. But a little proactive communication can go a long way in preventing confusion when people start filing their returns and claiming these new deductions.
The Bottom Line
For many employers (especially those outside traditional tipped industries), this is brand-new, uncharted territory. But the transition period is officially over, and compliance is mandatory. Fortunately, employers who prepare early can absorb these changes without much disruption. As always, preparation is the key to a smooth transition. Don’t wait until it’s too late! Contact us today to help streamline your processes.