Workers in the United States who receive tips or earn overtime will have a new and significant clue when they receive their W-2 form for 2026: two codes included by the IRS will help identify the amounts that can be used to claim the new federal deductions.
The change particularly affects workers in restaurants, bars, hotels, beauty services, transportation, delivery, and other occupations where tipping is common, as well as employees covered by federal overtime rules.
In the W-2 for 2026, which will be used to prepare the tax return for that year, box 12 may now display the codes TP and TT.
The code TP identifies certain tips reported to the employer, while TT identifies the compensation for overtime that meets the requirements of the new deduction.
The official IRS instructions for the 2026 W-2 and W-3 forms explain how these amounts should be reported.
CiberCuba previously explained the main tax changes that began to benefit workers with tips and overtime. The new feature now is that the tax information system for 2026 allows for a much more direct identification of these amounts in the documents received by the taxpayer.
What does TP mean on your W-2?
The new code TP appears in box 12 of the W-2 and corresponds to the total cash tips reported to the employer.
For the IRS, the concept of cash tips includes both money given directly by the customer and tips charged to a credit or debit card, as well as amounts received by employees through tip pooling systems.
However, that does not mean that any charge added to an account is an eligible tip.
Mandatory service charges are not considered qualified tips for this deduction, as they are not an amount given voluntarily by the customer.
Up to $25,000 in eligible tips
An eligible worker can deduct up to $25,000 annually in qualified tips from their income subject to federal income tax.
The $25,000 limit applies per declaration and does not automatically double just because both members of a marriage receive tips.
For example, if a person receives $18,000 in qualified tips during the year and meets the other requirements, they could use up to that $18,000 to calculate the deduction.
If you receive $32,000, the general limit for the deduction would be $25,000 before considering other income restrictions.
The deduction begins to phase out when the modified adjusted gross income exceeds $150,000, or $300,000 for married couples filing jointly.
The complete rules can be found in the official list of occupations with tips published by the IRS.
Not all jobs that receive a tip qualify
To claim the deduction, tips must have been received in a position that the Department of the Treasury and the IRS have recognized as an activity that traditionally received tips before December 31, 2024.
The final list includes over 70 occupations divided into eight main categories: food and beverages, entertainment and events, hotels and guest services, household services, personal services, beauty and wellness, recreation and instruction, and transportation and delivery.
Examples include waiters, bartenders, baristas, fast food workers, hotel staff, hairdressers, cosmetologists, massage therapists, delivery drivers, and other occupations.
The W-2 also includes a new box 14b, where the employer must indicate the code for the occupation that receives tips, known as the Treasury Tipped Occupation Code or TTOC.
What does TT mean on the W-2?
The second code to look for is TT.
It also appears in box 12 and corresponds to the compensation for qualified overtime.
But there is an essential difference: the deduction does not necessarily correspond to everything the worker earned during their overtime hours.
The regulation applies to the portion of compensation that exceeds the regular rate and must be paid under the Fair Labor Standards Act, known as FLSA.
The U.S. Department of Labor states that covered and non-exempt workers must typically receive at least one and a half times their regular rate for hours worked over 40 in a workweek.
Example: charging $30 for an extra hour does not mean deducting $30
Suppose a worker normally earns $20 per hour.
When working overtime, you receive time and a half: $30 per hour.
Out of those $30, the first $20 correspond to your regular fee.
The $10 additional is the portion that typically constitutes the qualified overtime compensation for this deduction.
If he works five extra hours, he would earn $150 for those five hours, but the qualified overtime amount would normally be $50: five hours multiplied by the additional $10.
That is the type of amount that the employer will report with the code TT.
Up to $12,500 in overtime, or $25,000 for couples
The maximum deduction for qualified overtime hours is $12,500 per individual return.
In a joint declaration of a couple, the maximum increases to $25,000.
Just like with tips, the benefit begins to decrease when the modified adjusted gross income exceeds $150,000 for certain individual filers or $300,000 on a joint return.
Not every overtime hour is included in the deduction
The expression "no tax on overtime" can be confusing because not all compensation that a company labels as overtime necessarily meets the tax requirements.
The compensation should be one extra hour required by section 7 of the FLSA.
For example, a voluntary additional payment for working on a Saturday, Sunday, or night shift does not automatically qualify as overtime if it does not correspond to an obligation established by federal regulations.
Not all workers are covered by the general overtime rules of the FLSA, as there are categories of exempt employees.
Tips and overtime continue to pay Social Security and Medicare
There is another important clarification.
The expressions "no taxes on tips" and "no taxes on overtime" do not mean that those amounts completely disappear from the tax system.
Tips and overtime compensation are generally subject to payroll taxes, including Social Security and Medicare.
The benefit serves as a deduction when calculating federal income tax.
Therefore, deducting $10,000 does not automatically mean receiving a $10,000 check or saving exactly that amount in taxes.
Real savings depend on the tax situation and taxable income of each taxpayer.
You must also have a valid Social Security number
To claim the deductions, there is another requirement that is particularly relevant for part of the immigrant community.
The person who received the tips or overtime must have a valid Social Security number for work issued before the tax return submission deadline, including any possible extensions.
An ITIN number by itself does not allow claiming the deduction for qualified tips.
The IRS has established a requirement for a valid SSN equivalent for those claiming the overtime deduction.
Additionally, married individuals must file a joint return to utilize these benefits.
What happens if you work for yourself?
The new rules are not limited solely to the W-2.
The IRS Publication 505 for 2026 also establishes new boxes for reporting tips on certain 1099 forms.
For example, tips may appear on forms 1099-MISC, 1099-NEC, or 1099-K through the new boxes designed to identify those payments and the corresponding occupation code.
The rules for self-employed workers have additional limitations, so it will not always be possible to deduct the full amount of tips received.
How to claim the deduction
Eligible amounts are used to calculate the new deductions on the Schedule 1-A of Form 1040.
The benefit is available to both those who use the standard deduction and those who itemize their deductions.
Tip and overtime provisions currently apply to the fiscal years 2025, 2026, 2027, and 2028.
What to check when you receive your W-2 for 2026
If you received tips during the year, check box 12 and see if the code TP appears.
Also check the new box 14b, where your occupation code should appear when applicable.
If you earned overtime hours under the FLSA rules, look for the code TT in box 12.
Don't assume that all the overtime money indicated on your pay stubs is deductible: compare the amount with the additional portion over your regular rate.
And if you notice a discrepancy between what you earned during the year and what appears on the tax documents, it is advisable to resolve it with your employer before filing your tax return.
The new codes do not inherently create the deduction, but they facilitate something that was previously quite more complicated: directly identifying in the tax documents how much of the tips and overtime can be used to reduce the income subject to federal tax.
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