OBBBA tips & overtime guide › Box 12 code TT for 2026
For tax year 2025 the IRS told employers not to worry: you were not required to separately report qualified tips or qualified overtime, and penalty relief covered you if you didn't. That was a one-year bridge, and you are now two-thirds of the way across the first year on the other side of it. For tax year 2026 and later, employers are required to separately report qualified overtime compensation, and on August 6, 2026 the IRS published FS-2026-13 — a substantially expanded set of FAQs that, for the first time, spells out the employer mechanics in detail.
The part that deserves your attention is not the penalty. It's this: under IRC section 225(a), an employee may only deduct qualified overtime compensation that you included on a properly furnished Form W-2. If the number isn't in box 12 with code TT, your employee cannot claim it — no matter how much qualified overtime they actually worked.
The one-line version: beginning with tax year 2026, report each employee's total qualified overtime compensation in Form W-2, box 12, code TT. Qualified overtime is only the premium portion — the "half" of time-and-a-half — that the FLSA actually requires, calculated per workweek. Report the full amount you paid even if it exceeds the employee's deduction cap. Get it wrong and you owe a Form W-2c.
The 2026 General Instructions for Forms W-2 and W-3 add the following, all of which are new relative to the 2025 form:
| Box | What goes in it |
|---|---|
| Box 12, code TT | Total amount of qualified overtime compensation. |
| Box 12, code TP | Total amount of cash tips reported to the employer. |
| Box 12, code TA | Employer contributions under a section 128 Trump account contribution program paid to a Trump account of an employee or a dependent. |
| Box 14a / Box 14b | Box 14 has been split. What used to be reported in box 14 — Other now goes in box 14a — Other. New box 14b reports the Treasury Tipped Occupation Code(s). |
| Box 9 | Reduced in size so that an additional entry can be input into box 14a. |
Form W-2c was re-released in January 2026 (revision date Rev. 1-2026) to carry the same fields, which matters because — see below — corrections are now a live obligation rather than a theoretical one.
This is where most of the errors will be, because the intuitive answer is wrong. Qualified overtime compensation is not the employee's overtime pay. It is only the amount of overtime compensation required under 29 USC § 207 that exceeds the employee's regular rate — the "half" in "time and a half." The IRS gives the general formula, and it is determined each workweek:
FLSA hours worked over 40 in the workweek
× one-half
× the employee's FLSA regular rate of pay
= qualified overtime compensation for that workweek
A workweek is a fixed and regularly recurring period of 168 hours — seven consecutive 24-hour periods. It can start on any day and at any hour you establish. Critically, each workweek stands alone: for overtime purposes there is no averaging of hours across two or more workweeks. If your payroll runs biweekly, you still owe a per-workweek calculation, not a per-pay-period one.
If you pay more overtime than the FLSA requires, only the amount minimally necessary to satisfy 29 USC § 207 is qualified. The IRS's own worked example: an employee at a $20/hour regular rate works 50 hours in a workweek, and the employer pays overtime at twice the regular rate. The employer paid $400 for those 10 overtime hours ($200 straight time plus a $200 premium). But the FLSA only required $300 ($200 straight time plus a $100 premium). Qualified overtime compensation is $100 — not $400, and not $200. The generous half of your overtime policy is real money to your employee, but it is not deductible money.
Under the FLSA the regular rate includes all remuneration for employment paid to or on behalf of the employee, except certain payments the statute specifically excludes. It is calculated by dividing total pay for employment in the workweek (less statutory exclusions) by the total number of FLSA hours actually worked. In practice that means things like nondiscretionary bonuses and certain commissions get folded into the regular rate — which raises it, which raises the qualified overtime figure. If your payroll system is computing the code TT number off the base hourly rate alone, it is probably understating it.
Only overtime required under section 7 of the FLSA counts. An employee who is ineligible for overtime under the FLSA does not receive qualified overtime compensation regardless of other laws or circumstances — including a collective bargaining agreement — that provide for overtime pay. Likewise, premiums you pay for hours beyond 8 in a day, hours beyond 35 in a week, or weekend and holiday work are non-FLSA premiums; you have to evaluate the payments under the FLSA's own principles to determine the amount the FLSA actually required.
This one catches small operators. An employee who owns at least a bona fide 20 percent equity interest in the enterprise where they work — any business form — and who is actively engaged in its management is treated as a bona fide executive, exempt from the § 207 overtime requirement, and therefore FLSA overtime-ineligible. No FLSA overtime requirement means no qualified overtime compensation, and nothing to put in code TT. An owner with a smaller stake might still be exempt under one of the other FLSA exemptions.
The deduction is capped at $12,500 per individual return ($25,000 on a joint return) and phases down above $150,000 of modified AGI ($300,000 joint). None of that is your problem to compute. The IRS is explicit: report the total qualified overtime compensation paid, which — because of limits applied on the employee's own return — may not be the amount ultimately deductible. Their example: an employer who paid $30,000 of qualified overtime in 2026 must report $30,000 in box 12 code TT, even though the deduction cap is far lower. The employee's Schedule 1-A (Form 1040) starts from your number and applies the limits.
The deduction does not make overtime tax-free. Overtime compensation, including qualified overtime compensation, is still subject to federal income tax withholding, and generally is not excluded or exempt from wages for employment tax purposes including Social Security and federal unemployment taxes. You may not reduce withholding on wages to account for the deduction on your own initiative. The only route is the employee furnishing you an updated, valid Form W-4 accounting for their expected deduction — the 2026 Form W-4 was updated to allow exactly that in step 4(b), and the IRS Tax Withholding Estimator was updated to match.
If you discover an error in box 12 code TT, you must file Form W-2c with SSA and furnish it to the employee as soon as possible. An employer that files or furnishes an incorrect Form W-2 may be subject to information reporting penalties under section 6721 or 6722 — with reduced penalties for timely corrections. Note what happens on the employee's side, because it explains why they will chase you for a W-2c:
Two smaller cases worth knowing. (a) If you compute FLSA overtime under an alternative method inside 29 USC § 207 rather than the general § 207(a) rule — the "8 and 80" schedule used by hospitals and certain residential care facilities, or the § 207(k) work periods used for public-sector fire protection and law enforcement — the premium actually paid under that provision is what determines qualified overtime, not a reconstructed § 207(a) calculation. (b) Qualified overtime is reported on Form 1099-MISC (box 14) or Form 1099-NEC (box 1d) only in the rare case where a worker is your employee for FLSA purposes but treated as an independent contractor for Internal Revenue Code purposes.
Our August 2026 mid-year payroll checkpoint turns this into an eight-question audit you can run against your own system in one sitting.
Code TT is a per-workweek number that has to be right for every week of 2026 — including the ones already behind you. TipLedger keeps each worker's qualified-overtime premium and qualified cash tips as a running per-workweek total, so at year end you are reading a figure rather than reconstructing eleven months of timecards.
See how TipLedger tracks it →