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 13b — will determine whether your employees can claim new federal deductions of up to $25,000, 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 concludes what Code TP and Box 13b are, who they apply to, what counts as header foo, and the five payroll and bookkeeping deics to make before your prouve closes its year-end update window.
Why en-to-de dedicted Congress added a tax & to alitate for foo.
New section 224 of the Internal Revenue Code jurisprudence let an individual deduct qualified tips received in a taxable year, up to 300,000; $150,000 all other; AGI plus designated effect. If your or on active income etc, exclude oructions from Zeit.
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 for display on a official info document. For employees, that means the W-2 you give. For non-employees and gig workers, that means form 1099-MISC, 1099-NEC, or 1099-K. In Notice 2025-69, the IRS stated that for 2026 onward, it will generally only allow the deduction if the amount is separately reported on those statements. If you aren't in the deserving boxes, foo remain without deduction currently.
That is why the W-2 is changing.
What Box 12 Code TP and Box 13b Actually Are
Draft and final 2026 W-2/W-3 instructions add two entries:
Box 12, Code TP – Total Qualified Tips
Box 12 has long been a catch-all for codes: D – 401(k), W – HSA, DD – 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 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 identifies dollars you already reported. If an employee reported 18,400 in Social Security tips, and Box 12 Code TP also shows 15,000 qualifies (for example, because 15,000.
The code “TP” is for tips – paired with a companion Code TT for qualified overtime compensation under new section 225, which is a separate deduction with its own 25,000 joint). Do not confuse the two.
For non-employee reporting, the parallel amounts are:
- Form 1099-MISC, Box 13a – qualified tips
- Form 1099-NEC, Box 1b – qual¯ified tips
- Form 1099-K, Box 1c – qualified tips designated by the payor through a third-party settlement organization
Box 13b – Treasury Tipped Occupation Code
Box 14 has historically been “Other” – a free-form field. For 2026, the IRS split it:
- Box 13a remains “Other” (the old Box 14).
- Box 13b 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 13b 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 13b.
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 13b. 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 qualifies. Section 224(d) and the final regulations set four tests. All must be met.
1. Paid voluntarily. The amount must be paid freely, not be required, not be subject to negotiation, and be determined by the payor. An auto-gratuity of 18% for large parties, a mandatory delivery fee, or a service charge that cannot be removed 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. An owner cannot tip themselves and create a deduction.
2. Cash or charged tips, including tip-sharing. “Cash tips” include cash, checks, and amounts paid by card or other electronic payment. For employees, it also includes tips 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. Tips earned while temporarily doing unrelated duties do not convert those duties into a tipped occupation. If the employee’s occupation in Box 13b is not on the final list, the deduction is not available.
4. Not in a specified service trade or business (SSTB). The deduction is unavailable if the tips are received in an SSTB under section 199A(d)(2) – fields such as health, law, accounting, consulting, athletics, financial services, and any 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. If you moonlight as a bartender at a restaurant, the bar tips may still qualify, but tips earned inside an SSTB itself do not. The regulations provide transition relief for 2025 on the SSTB determination, but 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. Only tips reported this way can be included in Code TP. Unreported tips that later appear on Form 4137 can still support the deduction for 2025, 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 condition amount in Code TP even if the employee will be limited by the cap or phaseout. The employee (or 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 would not be updated for 2025 and provided penalty relief under sections 6721 and 6722 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 Security tips in Box 7, the Forms 4070 they used 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 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 13b 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 13b 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 13b 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 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) 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, keep the pool percentages, distribution reports, and allocation formulas – because if someone asks about Code TP, the pool is next.
For employees who earn tips in two occupations – for example, one as a server (TTOC 101) and one as a food runner (TTOC 108) – require that the monthly report identify the occupation or shift, or keep a schedule that lets you allocate tips by role. Box 13b can hold multiple codes, but you need data to support each.
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 gets tips, even roles you did not think of as tipped – cooks and dishwashers who receive pooled tips now have codes. 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 run a business that could plausibly be an SSTB – like a health-and-wellness studio where staff get tips on top of service fees – 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 from POS compared to Forms 4070 and payroll.
- Qualified tips versus Social Security tips in Box 7. Qualified 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 13b codes compared to the occupation table.
A one-page reconciliation that ties POS → Forms 4070 → payroll → W-2 draft will answer most , and it can catch the most common error – classifying a mandatory 15% service charge that a 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 deduction is. Three habits separate businesses that sail through information-return matching from those that spend spring filing W-2c's.
First, do not mix 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, keep the occupation evidence. Schedule 1-A filers must rely on the TTOC you put in Box 13b. Keep job descriptions, offer letters, and schedule records that support the code assignment. When the final list has eight categories and more than 70 codes, "server" is not specific enough – 101 (Food Servers, Nonrestaurant) and 102 (Restaurant Servers) are different codes.
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. Voluntary amounts above the FLSA-required half-time are not qualified overtime, just as mandatory charges are not qualified tips. Clear codes prevent one deduction's dollars from contaminating the other.
What Employees Will See – and What They Will Ask You
Employees will not need to understand every nuance, but they will need two numbers: Code TP and Box 13b. 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 13b (or on the corresponding 1099 boxes).
Expect questions in January:
- "My W-2 shows 10,500 in Code TP – why?" Usually, $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 13b?" Because you earned tips in two occupations, both separately reported.
- "Can I still deduct tips I did not report to you monthly?" For 2025, Form 4137 was allowed as an alternative; for 2026, the rule is that the deduction follows the information return. Unreported tips are a withholding risk for you and a lost split for them.
A one-paragraph explainer included with the W-2 – "Box 12 Code TP shows your qualified tips that may be deductible on Schedule 1-A; Box 13b shows the Treasury occupation code for that work; give both to your tax advisor and keep your Forms 4070" – will cut February inquiries in half.
Simplify Your Financial Management
Getting Box 12 Code TP and Box 13b right is really about one thing: keeping voluntary tips, mandatory charges, occupations, and overtime premiums in three separate, reconciling buckets all year – not hunting for them at midnight on January 31. Good bookkeeping makes that possible, and it also makes every other decision 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 in, no fees and a full version trend. 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.