No Tax on Tips: Guide for Employers
The new federal tax provision commonly referred to as “No Tax on Tips” effecting tax years 2025 through 2028, creates a temporary income tax deduction for certain tip income. The name is catchy, but it can be misleading: tips are still income, still must be reported, and generally remain subject to payroll taxes. What changes is that eligible taxpayers may be able to claim a federal income tax deduction for certain “qualified tips” on their individual income tax returns.
What Are “Qualified Tips”?
Qualified tips generally are cash tips received by an individual in an occupation that customarily and regularly receives tips. Treasury and the IRS issued final regulations which includes a list of qualifying tipped occupations organized by Treasury Tipped Occupation Code, or TTOC.
To qualify, tips generally must be:
- Cash tips, including tips paid in cash, by check, credit card, debit card, gift card, or certain cash-equivalent payment methods.
- Received in a qualifying tipped occupation listed by Treasury/IRS.
- Paid voluntarily by the customer, without consequence for nonpayment, not negotiated, and determined by the customer.
- For tax years starting after 2025, reported on the proper information return or by the taxpayer, such as Form W-2, Form 1099-MISC, Form 1099-NEC, Form 1099-K, or reported by the taxpayer on Form 4137.
What Does Not Qualify?
Not every amount labeled a “tip” will qualify for the deduction. Employers should be especially careful in distinguishing tips from service charges, wages, and other required payments.
1. Mandatory service charges and automatic gratuities
Amounts such as mandatory service charges, automatic gratuities for large parties, or other required charges added to a customer’s bill generally are not qualified tips, even if later distributed to employees. Payment generally must be voluntary and customer-determined to qualify.
2. Digital assets and non-cash items
Cash tips include many cash and cash-equivalent payment methods, but do not include digital assets. Non-cash items such as event tickets or meals also are not cash tips.
3. Recharacterized wages
Anti-abuse rules are intended to prevent businesses or individuals from relabeling wages, service revenue, or other compensation as tips. Amounts that represent a recharacterization of wages or payments for goods or services are not qualified tips.
2026 Form W-2 Reporting Implications
Beginning with 2026 Forms W-2, employers should prepare for new reporting obligations designed to help employees calculate the tip deduction.
1. Box 12 Code TP
For 2026 and later, employers will report total cash tips using Form W-2, Box 12, Code TP. This amount is used by employees in determining the “No Tax on Tips” deduction.
2. Box 14b Treasury Tipped Occupation Code
Form W-2 Box 14 has been split for 2026. New Box 14b is used to report the employee’s Treasury Tipped Occupation Code(s), or TTOC(s), when the employer reports qualified tips in Box 12 using Code TP.
3. Box 1 remains unchanged
Even when tips are reported using Code TP, employers should still include the total reported tips in Box 1 wages as they have historically. The employee’s deduction does not reduce the amount reported in Box 1 and does not reduce wages subject to FICA.
Practical Action Steps for Employers and Payroll Teams
Businesses with tipped employees should ensure that payroll, point-of-sale, or timekeeping systems are updated or receive needed updates as soon as possible.
1. Identify tipped occupations
Review job titles and duties to determine which employees work in occupations listed under the Treasury/IRS tipped occupation list in Reg. §1.224-1. Where employees perform multiple roles, consider whether systems can separately track tips by role.
2. Distinguish tips from service charges
Review receipts, POS settings, banquet contracts, large-party charges, delivery charges, and event fees. Amounts that are mandatory or automatically imposed generally are not qualified tips.
3. Update W-2 reporting processes for 2026
Coordinate with payroll providers to confirm readiness for:
- Box 12 Code TP for total cash tips;
- Box 14b TTOC reporting; and
- continued inclusion of tips in Box 1 wages.
4. Document policies and classifications
Maintain documentation supporting:
- how tipped occupations were identified;
- how tips are distinguished from mandatory service charges; and
- how payroll systems capture and report tip amounts.
The following link provides the list of qualifying occupations and the related codes to be used in box 14b on Form W-2 https://home.treasury.gov/system/files/136/Tipped-Occupations-Detailed-8-27-2025.pdf.
AHP Can Help
Please contact your AHP representative if you would like assistance evaluating how the “No Tax on Tips” rules may apply to your business.
