As employers prepare for year-end payroll processing, several important changes under the One Big Beautiful Bill Act (OBBBA) are taking effect. These changes affect how certain overtime compensation, employee tips, and employer contributions to new Trump Accounts are reported to the Internal Revenue Service (IRS).
While much of the public attention has focused on the phrases “no tax on overtime” and “no tax on tips,” the actual requirements are more specific.
For employers, the biggest development is the introduction of three new Form W-2 Box 12 reporting codes beginning with the 2026 tax year.
Understanding these changes now can help organizations avoid reporting errors, prepare accurate Forms W-2, and answer employee questions.
1. No Tax on Overtime: What the New Law Actually Means
The OBBBA, signed into law on July 4, 2025, created a new federal income tax deduction for certain qualified overtime compensation earned during tax years 2025 through 2028.
However, the law does not make all overtime wages tax-free.
Under the new provisions, eligible employees may deduct the portion of their overtime compensation that exceeds their regular rate of pay, provided the overtime is required under Section 7 of the Fair Labor Standards Act (FLSA).
For most eligible employees receiving time-and-a-half overtime, this means only the additional half-time premium qualifies for the deduction.
Example:
An employee earns $20 per hour and works 10 overtime hours during a workweek.
- Regular hourly rate: $20
- Overtime hourly rate: $30
- Total overtime compensation: $300
- Qualified overtime premium: $100
In this example, the $100 overtime premium is potentially deductible, not the entire $300 overtime payment.
The maximum annual deduction is $12,500 for eligible individual taxpayers and $25,000 for married couples filing jointly.
The deduction begins phasing out when modified adjusted gross income exceeds $150,000 for individual filers or $300,000 for joint filers.
Important: Overtime compensation remains subject to applicable federal income tax withholding, Social Security taxes, and Medicare taxes. The employee claims the allowable deduction when filing their federal income tax return.
2. New for 2026: Box 12 Code TT for Qualified Overtime
One of the most significant changes for employers is the introduction of Form W-2 Box 12, Code TT.
Beginning with the 2026 tax year, employers must separately report the total amount of qualified overtime compensation paid to each employee.
This requirement is different from the transition relief provided for 2025, when employers were not required to separately report qualified overtime amounts.
In updated guidance released August 6, 2026, the IRS clarified several important reporting responsibilities:
- Employers must report qualified overtime compensation in Box 12 using Code TT.
- Employers must report the full amount of qualified overtime compensation, even when it exceeds the employee’s allowable deduction.
- Employers discovering an error in Code TT reporting must issue a corrected Form W-2c.
- Qualified overtime generally must be determined using the applicable FLSA overtime requirements.
For example, an employee who receives $15,000 in qualified overtime premiums during 2026 should have $15,000 reported under Code TT, even though the individual deduction limit is generally $12,500.
What employers should do: Review payroll earning codes and overtime calculations to ensure that FLSA-required overtime premiums can be properly identified and reported.
3. New Box 12 Code TP: Reporting Employee Cash Tips
The OBBBA also established a federal income tax deduction for certain qualified tips received during tax years 2025 through 2028.
Eligible taxpayers may deduct up to $25,000 annually in qualified tips, subject to income limitations and other eligibility requirements.
Beginning with 2026 Forms W-2, employers must use Box 12, Code TP to report the total amount of cash tips reported to the employer.
For these purposes, cash tips generally include voluntary cash tips, charged tips, and qualifying tips received through tip-sharing arrangements.
Mandatory service charges do not qualify as tips under this provision.
Additionally, the IRS has introduced a new Box 14b to report Treasury Tipped Occupation Codes.
These occupation codes help identify whether an employee works in an occupation that qualifies for the new tip deduction.
What employers should do: Organizations with tipped employees should verify that their payroll systems can accurately report employee cash tips and the applicable Treasury Tipped Occupation Codes.
Importantly, Code TP reports cash tips received, which is not necessarily the same as the amount an employee may ultimately deduct.
4. New Box 12 Code TA: Employer Contributions to Trump Accounts
Another OBBBA provision allows employers to make qualifying contributions to Trump Accounts established for eligible children.
Beginning July 4, 2026, employers may contribute up to $2,500 annually to a qualifying Trump Account through an eligible employer contribution program.
These contributions may be excluded from the employee’s gross income when applicable statutory requirements are satisfied.
The IRS has introduced Box 12, Code TA to report qualifying employer contributions made under these programs.
Unlike the overtime and tip provisions, Code TA will generally apply only to employers choosing to establish a qualifying Trump Account contribution program.
What employers should do: Employers considering this benefit should coordinate with their tax advisers and payroll providers before establishing a contribution program.
5. At a Glance: Three New W-2 Box 12 Codes for 2026
| New code | What it reports |
| TT | Total qualified overtime compensation |
| TP | Total cash tips reported to the employer |
| TA | Qualifying employer contributions to Trump Accounts |
Employers should also be aware that Form W-2 Box 14 has been divided into two sections for 2026.
Box 14a continues to report other applicable information, while Box 14b is designated for Treasury Tipped Occupation Codes.
These changes make accurate payroll data collection especially important throughout the year.
6. Does the OBBBA Change Federal Overtime Pay Requirements?
No. The OBBBA’s overtime tax deduction does not change the underlying federal rules governing which employees must receive overtime compensation.
The Department of Labor’s overtime exemption regulations are separate from the new tax deduction.
Following federal court decisions invalidating the 2024 overtime salary-threshold rule, the federal standard salary threshold for most executive, administrative, and professional exemptions remains $684 per week, equivalent to $35,568 annually.
Employees must still satisfy applicable salary and job duties requirements to qualify for an exemption.
Employers should also review state overtime requirements, which may be more protective than federal standards.
Another important distinction is that overtime paid solely because of state law, employer policy, or a collective bargaining agreement does not automatically qualify for the OBBBA deduction.
The qualifying amount must generally be overtime compensation required under the FLSA.
7. Five Steps Employers Should Take Before Year-End
With the 2026 reporting requirements approaching, employers should consider the following actions:
- Review overtime classifications and calculations. Confirm which employees qualify for FLSA overtime and whether payroll records accurately identify the required overtime premium.
- Verify payroll earning codes. Make sure qualified overtime amounts can be distinguished from other forms of premium pay, including certain bonuses, shift differentials, and overtime paid solely under company policy.
- Review employee tip reporting procedures. For organizations with tipped employees, confirm that cash tips and applicable occupation codes are properly recorded.
- Evaluate new employer benefit programs. Employers considering Trump Account contributions should understand the eligibility, program, and reporting requirements before implementing this benefit.
- Communicate with employees. Employees may mistakenly believe that overtime and tips are no longer subject to payroll taxes or withholding. Explain that these provisions generally create deductions claimed on individual income tax returns rather than eliminating payroll taxes.
8. What This Means for Churches, Nonprofits, Private Schools, and Small Businesses
The new reporting requirements can affect organizations of many sizes.
Churches and nonprofit organizations should pay particular attention to overtime earned by administrative personnel, facilities employees, and other nonexempt workers.
Private schools should review overtime practices for eligible administrative, maintenance, and support staff, recognizing that certain educational positions may qualify for specific FLSA exemptions.
Small businesses should evaluate whether their payroll and timekeeping systems can distinguish qualified overtime premiums from other compensation.
For organizations with limited administrative resources, accurate timekeeping and payroll reporting can help reduce year-end corrections and compliance challenges.
Preparing for a More Complex W-2 Season
The OBBBA introduces new opportunities for eligible employees to reduce their federal income tax liability. At the same time, it creates additional reporting responsibilities for employers.
The new Box 12 codes TT, TP, and TA represent meaningful changes to 2026 payroll reporting.
Employers who review their payroll practices, maintain accurate employee records, and prepare for these requirements before year-end will be better positioned for a smoother W-2 reporting season.
Payroll Partners Is Here to Help
At Payroll Partners, we understand that keeping up with changing payroll regulations can be challenging, particularly for organizations balancing payroll administration with other important responsibilities.
Our team is committed to helping clients navigate payroll reporting requirements and understand how regulatory changes may affect their organizations.
For questions about your payroll or year-end reporting, contact Payroll Partners at 866-757-8111 or visit www.payrollpartners.com.
Disclaimer: This article provides general educational information and should not be considered legal or tax advice. Employers should consult their qualified tax or legal advisers regarding their specific circumstances.
