OBBBA tips & overtime guide › August 2026 mid-year checkpoint
Tax year 2025 was a transition year: employers were not required to separately report qualified tips or qualified overtime, and penalty relief covered the gap. Tax year 2026 is not. Beginning with 2026, employers must separately report qualified overtime compensation, and the 2026 Form W-2 carries dedicated fields for both halves of the new deductions.
The awkward part of the calendar is that this obligation attached on January 1, 2026 — but the detailed employer guidance, IRS FS-2026-13, arrived on August 6, 2026. Most small operators have therefore already run roughly two-thirds of a year of payroll against a requirement whose mechanics were only fully spelled out this month. Nothing about that is your fault. It does mean that the cheapest time to find a data gap is now, while the year is still open and timecards still exist, rather than in January when you are reading a number off a form you cannot substantiate.
Why this is worth an hour of your time. Under IRC section 225(a) an employee can only deduct qualified overtime compensation that the employer included on a properly furnished Form W-2. If the figure is missing from box 12 code TT, your employee cannot claim the deduction, and a substitute form (Form 4852) does not fix it — the only remedy is a Form W-2c from you. A data gap you discover in August is a reporting task. The same gap discovered in February is a correction cycle plus an unhappy conversation with every hourly employee you have.
Qualified overtime compensation is determined each workweek: FLSA hours over 40 in the workweek × one-half × the FLSA regular rate. A workweek is a fixed, recurring 168-hour period, and each one stands alone — for overtime purposes there is no averaging across two or more workweeks.
If no: a biweekly or semimonthly total cannot be split into workweeks after the fact without the underlying daily hours. Confirm your timekeeping retains daily punches for all of 2026, and ask your provider specifically whether their code TT figure is computed weekly.
The FLSA regular rate includes all remuneration for employment except certain statutory exclusions, and is computed by dividing total workweek pay (less those exclusions) by total FLSA hours actually worked. Nondiscretionary bonuses and certain commissions therefore raise it.
If no: pull one employee who earned a bonus or commission in a week they also worked overtime, and compute both figures by hand. If they differ, every overtime week involving extra pay in 2026 is understated.
Where you pay more overtime than the FLSA requires, only the amount minimally necessary to satisfy 29 USC § 207 is qualified. In the IRS's example, an employer paying double time to a $20/hour employee for 10 overtime hours pays a $200 premium, but only $100 is qualified overtime compensation. Premiums for hours beyond 8 in a day, beyond 35 in a week, or for weekend and holiday work are non-FLSA premiums that have to be evaluated under the FLSA's own principles.
If no: a system that reports "overtime premium paid" is reporting the wrong number for you. This needs a rule change, not a report change.
Only overtime required under FLSA section 7 counts. An employee ineligible for overtime under the FLSA has no qualified overtime compensation regardless of other laws or a collective bargaining agreement providing overtime pay. Coverage and exemption are fact-specific determinations turning on occupation, work activities and earnings — the IRS points to the Department of Labor for them.
If no: start with the common exemptions DOL lists — executive, administrative and professional; outside sales; certain computer occupations; certain commissioned retail or service employees; certain motor carrier, rail, air and seamen roles; seasonal amusement or recreational establishments; certain agricultural work. This is the question most worth a professional's time.
An employee who owns at least a bona fide 20 percent equity interest in the enterprise where they work — in any business form — and who is actively engaged in its management is a bona fide executive, exempt from the § 207 overtime requirement, and therefore FLSA overtime-ineligible. There is no qualified overtime compensation to report for them.
If yes (they appear as eligible): that is likely wrong, and it is a common small-business error. An owner with a smaller stake may still be exempt under another exemption.
The 2026 Form W-2 uses box 12 code TP for the total amount of cash tips reported to the employer, and box 14 has been split so that new box 14b carries the Treasury Tipped Occupation Code(s). Box 14a now holds what used to go in box 14 — Other.
If no: occupation coding is a per-employee attribute that does not exist anywhere in most legacy payroll setups. Adding it in August is data entry; adding it in January is data archaeology. Our occupation-list walkthrough covers which roles and which tips qualify.
You should be. The deduction does not exclude or exempt overtime from gross income; overtime compensation generally remains subject to federal income tax withholding, Social Security, and federal unemployment taxes. And you may not reduce an employee's withholding to account for the deduction unless that employee furnishes an updated, valid Form W-4 — the 2026 Form W-4 handles it in step 4(b), and the IRS Tax Withholding Estimator was updated to match.
If no: stop and reconcile immediately. Under-withholding driven by a "no tax on overtime" headline is a deposit problem, not a reporting problem, and it lands on you.
If your payroll provider added code TT support partway through 2026, find out whether it recalculated from January 1 or simply started tracking from the upgrade date. Those two behaviours produce very different W-2s.
If no: this is the question with a real deadline attached, because it depends on records that get harder to obtain over time — prior-provider exports, terminated employees' timecards, a POS tip log from a system you have since replaced. Everything else on this list can be fixed in December. This one gets more expensive every month.
| Field | What you need to have ready |
|---|---|
| Box 12, code TT | Total qualified overtime compensation paid in 2026 — the FLSA-required premium only, summed from per-workweek figures. Report the full amount even if it exceeds the employee's deduction cap. |
| Box 12, code TP | Total cash tips reported to the employer. |
| Box 14b | Treasury Tipped Occupation Code(s) for tipped employees. |
| Supporting records | Per-workweek hours and regular-rate inputs sufficient to substantiate the code TT figure — and to produce a Form W-2c quickly if anything is later found wrong. |
The deduction limits themselves — $12,500 per return, $25,000 joint, phasing down above $150,000 modified AGI ($300,000 joint) — are the employee's business, computed on their Schedule 1-A. You report the gross figure; they apply the caps.
Every question above is really the same question: does a per-employee, per-workweek record exist for the part of 2026 that already happened? TipLedger keeps qualified cash tips, occupation codes, and the qualified-overtime premium as running per-workweek totals, so year-end is a read rather than a reconstruction.
See how TipLedger tracks it →