The transition to the 2026 tax year brings a significant shift in federal reporting requirements under the One Big Beautiful Bill Act (OBBBA).
Under the new law, individuals can claim a deduction for federal income tax on ‘qualified tips’ for a limited time. This OBBBA measure covers the period from January 1, 2025, to December 31, 2028, allowing for tax relief effective as of January 1, 2025.
The bill creates a tax credit for employees to claim on their personal tax return for qualified tips received, and like the overtime premium, employers will still withhold federal, state, and local taxes as normal, as the deduction applies to the employee’s tax return.
“Qualified Tips” are defined as cash-based payments received by those in roles that traditionally earned tips before 2025. This category covers physical cash, digital credit card tips, and funds distributed through tip-pooling agreements.
To qualify, these payments must be made freely by the customer without pressure or negotiation, with the final amount decided by the client. Fixed service fees and automatic gratuities do not count as qualified tips.
For 2026, employers will be required to:
- Accurately track and report voluntary tips
- Distinguish between voluntary tips and mandatory gratuities
- Report the total annual qualified overtime premium using Code TP in Box 12 of the W-2 (Subject to future guidance from IRS)
- Report in Box 14B the Treasury Tipped Occupation Code (TTOC), which verifies eligibility for the deduction (Subject to future guidance from IRS)
The OBBBA is complex, but IPS is here to help you work through the changes and keep your business compliant. If you need assistance, reach out to your IPS representative.