If you run a restaurant, salon, coffee shop, bar, hotel, or any business where cash tips change hands, the W-2 you hand to every tipped employee in January 2027 will look different from every W-2 you have ever issued before. Two new entries — Box 12, Code TP and Box 14b — will determine whether your employees can claim up to $25,000 in new federal deductions, and whether your payroll records will survive an IRS information-return match.
The change comes from the One, Big, Beautiful Bill Act (P.L. 119-21, signed July 4, 2025), which created a temporary deduction for "qualified tips" for tax years 2025 through 2028. For 2025, the IRS gave everyone a pass: no W-2 changes and penalty relief for imperfect reporting. For 2026, the pass expires. Starting with the wages you pay on January 1, 2026, you must separately account for qualified tips and the occupation in which they were earned — or your employees lose the deduction and you create a paperwork gap the IRS can see.
This guide explains what Code TP and Box 14b are, who they apply to, what counts as a qualified tip, and the five payroll and bookkeeping moves to make before your provider closes its year-end update window.
Why Congress Added a Deduction — and a Reporting Mandate — for Tips
New section 224 of the Internal Revenue Code lets an individual deduct qualified tips received in a taxable year, up to $25,000 per return, against federal income tax. The deduction is "below the line" — it reduces taxable income whether the taxpayer takes the standard deduction or itemizes — but it phases out once modified adjusted gross income (MAGI) exceeds $150,000 ($300,000 for joint filers). MAGI for this purpose is AGI plus any excluded foreign earned income, housing exclusion, or income from American Samoa and Puerto Rico. If you have no foreign exclusions, MAGI equals AGI.
The deduction is temporary. It applies only to tax years beginning after December 31, 2024 and before January 1, 2029, unless Congress extends it. It also requires that the taxpayer include a valid Social Security number on the return and, if married, file jointly. Married filing separately is ineligible.
To claim it, however, tips must appear on an official information statement. For employees, that means the Form W-2 you furnish. For non-employees and gig workers, that means Forms 1099-MISC, 1099-NEC, or 1099-K. In Notice 2025-69, the IRS said plainly: for 2026 onward, it will generally only allow the deduction for amounts separately reported on those statements. If you do not put the number in the right box, your employee cannot take the deduction — even if the tips were real.
That is why the W-2 is changing.
What Box 12 Code TP and Box 14b Actually Are
The draft and final 2026 Forms W-2 and W-3 instructions add two entries:
Box 12, Code TP — Total Qualified Tips
Box 12 has long been a catch-all for coded amounts: D for 401(k) deferrals, W for HSA contributions, DD for health coverage cost, and so on. Starting in 2026, Code TP reports the total amount of cash tips reported to you by the employee under section 6053(a) that qualify as "qualified tips" under section 224.
In plain terms: it is the subset of the tip income already included in Boxes 1, 5, and 7 that meets the legal definition of a qualified tip. It does not create new income — it separately identifies dollars you already reported. For an employee who reported $18,400 in cash tips during 2026 and all of it qualifies, Box 7 will still show $18,400 in Social Security tips and Box 12 Code TP will also show $18,400. If only $15,000 qualifies (for example, because $3,400 was a mandatory service charge recharacterized as wages), Code TP shows $15,000.
The code is "TP" for tips — paired with a companion Code TT for qualified overtime compensation under new section 225, which is a separate deduction with its own $12,500 per return limit ($25,000 joint). Do not confuse the two.
For non-employee reporting, the parallel codes are:
- Form 1099-MISC, Box 13a — qualified tips
- Form 1099-NEC, Box 1b — qualified tips
- Form 1099-K, Box 1c — qualified tips designated by the payor through a third-party settlement organization
Box 14b — Treasury Tipped Occupation Code
Box 14 has historically been "Other" — a free-form field for state disability tax, union dues, parking, or anything an employer wanted to itemize. For 2026, the IRS split it:
- Box 14a remains "Other" (the old Box 14).
- Box 14b is now Treasury Tipped Occupation Code(s) — a three-digit code that identifies the occupation in which the tips were earned.
The code comes from a new Treasury Tipped Occupation Code (TTOC) system published in final regulations on April 10, 2026. The list covers more than 70 occupations grouped into eight categories, including food and beverage service, personal appearance and care, hospitality and gaming, transportation, personal services, and others. The familiar occupations are there — servers, bartenders, baristas, hair stylists, nail technicians, bellhops, taxi and rideshare drivers, valet attendants — but the final list also added occupations many employers do not associate with tipping, such as floral designers, visual artists, and gas pump attendants, after the IRS reviewed more than 300 public comments.
Why an occupation code at all? Because section 224(d)(1) limits the deduction to tips received in an occupation that customarily and regularly received tips on or before December 31, 2024, as determined by the Secretary. The IRS must publish that list, and Box 14b is how you certify to the IRS and your employee which list entry applies. An employee with two tipped roles — say, a server who also bartends — may have two codes in Box 14b.
For the 1099 series, the occupation code appears in:
- Form 1099-MISC, Box 13b
- Form 1099-NEC, Box 1c
- Form 1099-K, Box 1d (occupation of the payee)
If you report Code TP, you must report Box 14b. Reporting one without the other will trigger a mismatch.
What Counts as a "Qualified Tip" — and What Does Not
Not every dollar a customer leaves on the table qualifies. Section 224(d) and the final regulations set four tests. All must be met.
1. Paid voluntarily. The amount must be paid voluntarily without consequence for nonpayment, not be subject to negotiation, and be determined by the payor. An auto-gratuity of 18% for parties of six, a mandatory delivery fee, or a service charge that a customer cannot remove is not a qualified tip — even if you distribute it to staff. The final regulations create an irrebuttable presumption that a payment is not qualified if the employer is the payor or the recipient has a direct ownership interest in the payor. In other words, an owner-operator cannot tip themselves and create a deduction.
2. Cash or charged tips, including tip-sharing. "Cash tips" includes cash, checks, and amounts paid by credit or debit card or other electronic settlement. For employees, it also includes tips received under a tip-sharing or tip-pooling arrangement. Non-cash tips — tickets, gift cards, merchandise — do not qualify. Neither do tips the employee failed to report to you.
3. In a qualifying occupation. The tip must be received while working in an occupation on the Treasury list described above. Tips earned while temporarily performing unrelated duties do not convert those duties into a tipped occupation. If the employee's listed occupation in Box 14b is not on the final list, the deduction is unavailable for those tips.
4. Not in a specified service trade or business (SSTB). The deduction is unavailable if the tips are received in the course of a trade or business that is an SSTB under section 199A(d)(2) — fields such as health, law, accounting, consulting, athletics, financial services, and any trade or business where the principal asset is the reputation or skill of one or more owners or employees. For employees, the SSTB test looks through to the employer's business. A licensed professional who moonlights as a bartender at a restaurant can still qualify for the bar tips, but tips earned inside an SSTB itself do not. The regulations provide transition relief for 2025 on the SSTB determination while taxpayers learn the boundary; for 2026, you should document the determination.
Two additional limits trip people up:
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Reported to the employer matters. Under section 6053(a), every employee who receives $20 or more in cash tips in a calendar month must report them to the employer in writing by the 10th of the following month, typically on Form 4070 or a substitute. Only tips reported through that process can be included in Code TP. Unreported tips that the employee later reports on Form 4137 (Social Security and Medicare Tax on Unreported Tip Income) can still support the deduction for 2025 under the transition rule, but for 2026 the IRS expects the amount to be on the W-2.
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$25,000 cap and phaseout reduce the benefit, not your reporting. You report the full qualified amount in Code TP even if the employee will ultimately be limited by the $25,000 ceiling or the MAGI phaseout. The employee (or their tax preparer) does the limitation math on Schedule 1-A. Do not pre-apply the cap in payroll.
Why 2025 Was Forgiven but 2026 Will Not Be
If you issued 2025 W-2s in January 2026, you noticed nothing changed. That was intentional. In IR-2025-82 and Notice 2025-62, the IRS announced that Forms W-2, 1099-NEC, 1099-MISC, and 1099-K would not be updated for 2025 and provided penalty relief under sections 6721 (failure to file correct information returns) and 6722 (failure to furnish correct payee statements) for employers who did not separately account for cash tips or qualified overtime in 2025.
Notice 2025-69 then told employees how to claim the deduction anyway for 2025, using any of: the Social Security tips in Box 7, the Forms 4070 they used to report tips monthly, an amount the employer voluntarily placed in Box 14, or Line 4 of Form 4137.
That tolerance ends December 31, 2025. The transition rule in sections 70201(k) and 70202(h) of the OBBBA that let payors approximate tips by any reasonable method applies only to periods before January 1, 2026. The final 2026 instructions, published in late 2025, state the new boxes plainly and do not extend the relief. For wages paid on or after January 1, 2026:
- You must separately track cash tips reported under section 6053(a) and distinguish qualified tips from non-qualified amounts.
- You must include the total qualified amount in Box 12 Code TP on every relevant W-2.
- You must include the applicable TTOC(s) in Box 14b on every W-2 that has a Code TP amount.
- The same separate accounting is required on 1099-MISC, 1099-NEC, and 1099-K where you designate tips.
If the amount is not on the statement, the employee generally cannot deduct it for 2026. That shifts the compliance burden squarely to you as the information-return filer.
Five Moves to Make Before Your Payroll Provider Closes Year-End Updates
Most small employers do not program W-2s themselves — a payroll provider, PEO, or CPA does. But the provider can only map what you give it. Work through these steps in November and December, not in January when corrections already require a W-2c.
1. Confirm your provider will support Code TP and Box 14b for 2026
Call your provider now and ask three specific questions: Will Box 12 Code TP be available for pay period 1 in 2026? Will Box 14b be writable through the portal and the file upload template? How will you handle employees with more than one tipped occupation? If the answer is "we are still evaluating," get it in writing with a timeline and a named contact. Providers that waited for the final TTOC list in April 2026 may still be updating mapping tables in the fall. If yours is behind, you need a manual workaround approved by your tax advisor, not a surprise on January 10.
2. Separate voluntary tips from mandatory charges at the point of sale
Pull your POS and payroll reports side by side. Every line that your POS labels "gratuity" must be classified as either voluntary (customer can leave $0, change the amount, or negotiate it) or mandatory (auto-grat, service charge, delivery charge, facility fee). Mandatory amounts are wages for FICA and withholding, not qualified tips, and must be excluded from Code TP even if you distribute 100% to staff. If your POS defaults every add-on to "gratuity," fix the label now. For 2026, you will need a defensible, repeatable method and a paper trail that ties each payroll tip figure to a POS voluntary-tip report.
3. Tighten the monthly tip-reporting workflow
Section 6053(a) has always required written monthly tip reports, but many businesses operate on informal verbal estimates. For 2026, informal breaks the chain. Standardize on Form 4070 or an electronic substitute that captures date, amount, and employee signature or acknowledgment, and enforce the 10th-of-the-month deadline. Retain the Forms 4070 with payroll records. If you operate a tip pool or tip-sharing arrangement, keep the pool percentages, distribution reports, and any allocation formulas — an examiner who asks about Code TP will ask about the pool next.
For employees who earn tips through two occupations — for example, a team member who works as both a server (TTOC 101) and a food runner (TTOC 108) — require that the monthly report identify the occupation or shift, or maintain a schedule that lets you allocate tips by role. Box 14b can hold more than one code, but you need data to support each code you list.
4. Map every tipped role to its Treasury code
Download the final TTOC list and build a simple table: Job Title → Department → TTOC → SSTB determination (yes/no). Do it for every title that receives tips, even incumbents in roles you did not think of as tipped — cooks and dishwashers who receive pooled tips, for example, now have explicit codes in the final regulations. Share the table with HR and payroll so hiring a new "beverage runner" in July does not create an unmapped W-2 in January.
Document the SSTB question in the same table. For most restaurants, bars, salons, hotels, and transportation businesses the answer is no. If you operate a business that could plausibly be an SSTB — a health-and-wellness studio where staff receive tips on top of service fees, for example — get a written determination from your CPA and note it on the table. That memo is the record that supports excluding or including those tips from Code TP.
5. Reconcile monthly so January is not a scramble
Add a monthly reconciliation to your close checklist:
- Total voluntary tips reported on POS and on Forms 4070 compared to tips posted to payroll.
- Qualified tips (voluntary + qualifying occupation + non-SSTB + reported) compared to Box 7 Social Security tips. Qualified tips should never exceed Box 7, and should equal Box 7 when all tips qualify.
- Box 12 Code TP compared to the qualified-tip ledger; Box 14b codes compared to the occupation table.
A one-page reconciliation that ties POS → Forms 4070 → payroll → W-2 draft will answer 90% of the questions a CPA, auditor, or IRS notice will ask. It also catches the most common error — classifying a 15% hospital-delivery surcharge that a catering contract calls a "gratuity" as a qualified tip — while there is still time to correct withholding and FICA.
How Bookkeeping Choices Affect the Deduction
Payroll is where the W-2 is built, but bookkeeping is where the audit is won. Three habits separate businesses that sail through information-return matching from those that spend spring filing W-2c's.
First, do not co-mingle voluntary tips with service charges in revenue. Record voluntary tips as a liability (Tips Payable) when collected, not as revenue, and record mandatory service charges as revenue and then as wage expense when distributed. If your chart of accounts has a single "Service Charges & Tips" income account, split it now. A tipped employee's deduction depends on that split being accurate.
Second, retain the occupation evidence. Schedule 1-A filers must ultimately rely on the TTOC you put in Box 14b. Keep job descriptions, offer letters, and schedule records that support the code assignment. When the IRS final regulations list eight categories and more than 70 codes, "server" is not specific enough — 101 (Food Servers, Nonrestaurant) and 102 (Restaurant Servers) are different codes, and choosing the more precise one is part of getting Box 14b right.
Third, track tip income separately from overtime premium. If you also pay overtime that could qualify under section 225 (Box 12 Code TT), keep that premium on its own payroll earnings code, calculated as the amount in excess of the regular rate required by 29 U.S.C. § 207. Amounts you pay voluntarily above the FLSA-required half-time premium are not qualified overtime, just as mandatory charges are not qualified tips. Clear earnings codes prevent one deduction's dollars from contaminating the other's.
What Employees Will See — and What They Will Ask You
Employees will not need to understand every nuance of section 224 to file, but they will need two numbers from you: Code TP and Box 14b. On the 2026 Schedule 1-A instructions and Publication 505, the IRS tells employees to look for qualified tips in W-2 Box 12 Code TP and the occupation code in Box 14b (or on the corresponding 1099 boxes: 1099-MISC 13a/13b, 1099-NEC 1b/1c, 1099-K 1c/1d).
Expect questions in January:
- "My W-2 shows $12,000 in Box 7 but only $10,500 in Code TP — why?" The answer is usually that $1,500 was a mandatory auto-gratuity recharacterized as wages, or tips earned outside a qualifying occupation or reported late.
- "I work as a server and a host — why are there two codes in Box 14b?" Because you earned tips in two occupations, both separately reported.
- "Can I still deduct tips I did not report to you monthly?" For 2025, the IRS allowed Form 4137 as an alternative path; for 2026, the expectation is that the deduction follows the information return. Unreported tips are both a withholding risk for you and a lost deduction for them.
A one-paragraph explainer included with W-2s — "Box 12 Code TP shows your qualified tips that may be deductible on Schedule 1-A; Box 14b shows the Treasury occupation code for that work; give both to your tax preparer and keep your copies of Forms 4070" — will cut February inquiries in half.
Simplify Your Financial Management
Getting Box 12 Code TP and Box 14b right is really about one thing: keeping voluntary tips, mandatory charges, occupations, and overtime premiums in separate, reconcilable buckets all year — not hunting for them at midnight on January 31. Good bookkeeping makes that possible, and it also makes every other decision you make about margins, staffing, and pricing clearer.
Beancount.io provides plain-text accounting that gives you complete transparency and control over your financial data — no black boxes, no vendor lock-in, and a full version history for every entry. Whether you are reconciling POS tips to payroll or building the monthly close that proves your W-2s are right, it keeps the source of truth where it belongs: with you. Get started for free and see why business owners who want auditable books are switching to plain-text accounting.