Editorial · July 4, 2026
No tax on tips deduction: what employers must report
No tax on tips deduction rules took effect one year ago today, when Public Law 119-21 became law on July 4, 2025. The short answer for employers is this: you do not claim the deduction, your workers do. Your job is to record cash tips and occupations correctly so they can. Starting with Forms W-2 for 2026, that means a new box 12 code and a new box 14b.
What the deduction does
The law lets eligible workers deduct qualified tips on their federal income tax return for four tax years, starting with 2025. The most a worker can deduct in a year is $25,000. The deduction shrinks once modified adjusted gross income goes above $150,000, or $300,000 for joint filers. Workers can take it whether or not they itemize. They must include a Social Security number, and married workers must file jointly.
The deduction only changes income tax. Tips are still wages for payroll purposes. They are still generally subject to federal income tax withholding and to both the employer and employee share of Social Security and Medicare tax once they reach $20 in a month.
Who qualifies and what counts as a tip
A worker needs two things. First, the worker must be in an occupation the IRS lists as customarily and regularly receiving tips on or before December 31, 2024. Second, the money must be a qualified tip. In April 2026, Treasury and the IRS issued final regulations (T.D. 10044) that adopted the September 2025 proposal. The final list covers more than 70 occupations. It added visual artists and floral designers in personal services, and gas pump attendants in transportation and delivery.
A qualified tip is paid in cash or a cash equivalent, such as a card payment, gift card or mobile payment. It must come from a customer, or from a tip pool or other tip-sharing arrangement. The customer must pay it voluntarily, and it cannot be up for negotiation. A service charge is not a qualified tip unless the customer can drop or change it. An automatic 18 percent charge on a large party is the example the IRS gives.
Two limits matter to business owners. Workers in a specified service trade or business, and employees whose employer is one, are not eligible. And the final rules say a payment is not a qualified tip if the facts show it is really wages or payment for services relabeled as a tip. When the employer is the one paying the tip, the rules treat that as a relabeling with no way to argue otherwise.
What employers reported for 2025
For 2025, the forms did not change. The IRS had said Forms W-2 and 1099 for that year would not be updated, so employers had no place to show a separate tip amount or an occupation. On November 5, 2025, the IRS issued Notice 2025-62. It treats 2025 as a transition year. The IRS will not charge the penalties for filing or furnishing incorrect returns (sections 6721 and 6722) if a W-2 or information return leaves out the separate cash tip amount or the worker's occupation.
The relief has a catch. The return or statement still has to be complete and correct in every other way, including the tips that are normally reported. The notice also encourages employers and payors to give tipped workers their occupation codes and a tip total, for example through an online portal. It adds that employers should tell workers whether the business is a specified service trade or business.
Workers were not left waiting. On November 21, 2025, Notice 2025-69 told them how to work out the deduction without a new form. A server could use the Social Security tips in box 7 of the W-2. A bartender could use tips reported to the employer, plus tips reported on Form 4137. A self-employed guide could use a daily tip log.
What changes on the 2026 Form W-2
The 2026 forms add the missing pieces. For 2026, the IRS describes two changes in its General Instructions for Forms W-2 and W-3. Box 14 is now split into box 14a and box 14b. Box 14a holds what used to go in box 14, and box 14b holds the Treasury Tipped Occupation Code.
- Box 12, code TP. Report the total cash tips the employee reported to you.
- Box 14b. When you use code TP, you must also list an occupation code here. Enter up to two codes. If tips came from more than two jobs, list any two.
- Code 000. If any tips were earned in a job that does not qualify, one of the codes must be 000.
The codes come from the IRS tipped occupations page. These forms cover pay made in 2026. Payors that report to non-employees on Forms 1099 or through payment settlement entities face the same idea: show the cash tips and the recipient's occupation.
What employers can do now
Start with your tip records. Check that your payroll system captures the cash tips employees report, and that tip pools and shared tips are recorded the same way each pay period. Then assign each tipped worker an occupation code from the IRS list. Workers with two jobs may need two codes.
Next, look at your service charges. If a charge is mandatory, it is not a qualified tip, so keep it separate from voluntary tips in your books. Review your own business type too. If you may be a specified service trade or business, tell your staff, since it affects their eligibility. Last, tell workers where to find their numbers. A short note with their tip total and code saves questions at tax time. This is general information, not tax advice. For your own payroll, ask a CPA or payroll provider about tip reporting.