No tax on tips: what restaurant owners must do before January's W-2s

In January your servers will open their W-2s and ask where the "no tax on tips" number is. This year, for the first time, the form has a place for it, and you are the one who fills it in.

No tax on tips is a federal income tax deduction your employees claim on their own returns, up to $25,000 a year for 2025 to 2028. Your part as the employer is reporting. On the 2026 W-2, due by 1 February 2027, put the total cash tips reported to you in Box 12 with code TP, and up to two Treasury Tipped Occupation Codes in Box 14b. FICA is unchanged, and the IRS has announced no relief for 2026. Last checked: 5 November 2026.

What is "no tax on tips", and who gets it?

The deduction was created by Public Law 119-21, the One Big Beautiful Bill Act, as new section 224 of the tax code. The final rules, Treasury Decision 10044, were published in the Federal Register on 13 April 2026 and took effect on 12 June 2026.

The main points for a restaurant owner:

• It is the employee's deduction, not yours. Staff claim it on their own federal return. It is not a payment from you.
• It is capped at $25,000 a year "regardless of filing status". A married couple who both work in restaurants share one $25,000 cap on their joint return; the final rules give that exact example.
• It phases out by $100 for every $1,000 of modified adjusted gross income over $150,000, or $300,000 for joint filers.
• It needs a valid Social Security number, and married employees must file jointly.
• It runs for tax years 2025 to 2028 only.
• It cuts federal income tax only. Tips are still subject to Social Security and Medicare (FICA) withholding when an employee receives $20 or more in a month, as the 2026 W-2 instructions note. State income tax depends on each state's own rules.

The National Restaurant Association advises employers (30 October 2025) to call it a "deduction", not a "credit", when talking to staff. A deduction lowers taxable income; it is not money handed back. That one word heads off a lot of disappointment in April. Overtime has its own, separate deduction with a $12,500 cap, reported in box 12 code TT; our no tax on overtime guide covers it.

Which tips qualify for the deduction?

Under the final rules, a qualified tip must be paid voluntarily, "without any consequence in the event of nonpayment", and its amount must be set by the guest, not negotiated or imposed. In a restaurant that means:

The service charge line is the one restaurants trip on. The 2026 W-2 instructions say it directly: "Mandatory service charges added to the bill are not qualified tips." Our guide is a service charge a tip? explains the IRS test.

Managers should not be in a tip pool anyway. The FLSA bars managers and supervisors from receiving pool money, as our tip pooling guide explains.

Which occupation codes do restaurant staff get?

Only tips earned in an occupation on the IRS list qualify. The list covers jobs that customarily received tips on or before 31 December 2024. Each job has a three-digit Treasury Tipped Occupation Code (TTOC), and the 2026 W-2 needs it. The restaurant codes from the IRS TTOC page (last reviewed 28 June 2026):

The final rules say cooks and dishwashers count even without customer contact, and assistants or apprentices to a listed job count too. The IRS page names "barista" as an example under 107. For any role that is not obvious, check the examples on the IRS page before you choose a code. The "typical roles" column is our mapping, apart from the barista example.

What changes on the 2026 W-2?

Three things are new, all in the IRS General Instructions for Forms W-2 and W-3 (2026):

1. Box 12, code TP: "the total amount of cash tips reported to the employer." When you use code TP, you must also enter an occupation code in Box 14b.
2. Box 14 is split. Box 14a is the old "Other" box. Box 14b holds up to two Treasury Tipped Occupation Codes for the jobs in which the tips were received. If someone earned tips in three or more, enter any two.
3. The "000" rule: "If any tips were received in a nonqualifying occupation, then '000' must be input as one of the occupation code(s)."

How the main kinds of pay land on the 2026 form:

The tips-versus-service-charge split follows the IRS fact sheet FS-2017-08. Code TP is "the total amount of cash tips reported to the employer", and allocated tips are by definition not reported to you, so ask your payroll provider before adding them if you file Form 8027.

Deadline: 2026 Forms W-2 and W-3 go to the Social Security Administration by 1 February 2027, and employee copies are due the same day. Our January filing calendar has the other forms due around it.

What about 2025? The 2025 forms were not updated, and in Notice 2025-62 the IRS waived penalties for 2025 for not reporting tips and occupation codes separately. Workers claim their 2025 deduction under Notice 2025-69. That relief covered 2025 only: 2026 is the first year the new boxes are on the form.

Worked example: three employees' 2026 W-2s

Here is how three employees' 2026 pay would look. The tax savings use an assumed 22% federal bracket for illustration only.

Bartender: $18,000 in card and cash tips reported to you, plus $3,500 as her share of the 18% large-party service charge.

• Box 12 code TP: $18,000 (tips only).
• Box 14b: 101.
• The $3,500 service charge share sits in Boxes 1, 3 and 5 as wages.
• Her deduction base is $18,000, not $21,500.

Server with high tips: $32,000 in tips, single, income well under $150,000.

• Box 12 code TP: $32,000. Box 14b: 102.
• His deduction is capped at $25,000. At 22% that saves $5,500 of federal income tax.
• FICA still applies to all $32,000: 7.65% is $2,448 withheld from him, and you pay a matching $2,448.

Server who also covers shifts as a cook: tips from both jobs.

• Box 14b: 102 and 105. Both are on the list, so no "000" is needed.

The phase-out only touches high earners. A single filer with $20,000 of qualified tips and modified adjusted gross income of $170,000 is $20,000 over the threshold, so the deduction drops by 20 × $100 = $2,000, to $18,000.

The employer FICA you pay on tips is unchanged, and so is your ability to claim it back through the FICA tip credit. Our tip credit guide shows that calculation.

January checklist for owners

Copy this into your year-end notes, and send it to your payroll provider now rather than in late January.

NO TAX ON TIPS: 2026 W-2 CHECKLIST

[ ] List every employee who received tips in 2026.
[ ] Map each tipped job to a TTOC code (101 bartenders, 102 servers,
    104 bussers, 105 cooks, 107 counter staff and baristas,
    108 dishwashers, 109 hosts).
[ ] Flag anyone with tips from a job not on the IRS list: they need "000".
[ ] Separate tips from service charges and auto-gratuities in payroll.
    Only real tips go in Box 12 code TP and Box 7.
[ ] Check every card reader, kiosk and QR tip screen has a zero or
    "no tip" option.
[ ] Confirm no manager or supervisor took a share of a tip pool.
[ ] Confirm your payroll provider supports Box 12 code TP and Box 14b.
[ ] File W-2s and W-3 with the SSA and give staff copies by 1 February 2027.
[ ] Tell staff what the deduction is, and what it is not.

Clean tip records make most of this list easy. If you can pull each employee's tips for the year, kept apart from service charges, the Box 12 total is a sum rather than a reconstruction.

What should you tell your staff?

Staff will ask you, not the IRS. A short note avoids promises you cannot keep:

About "no tax on tips"

- It is a deduction you claim on your own federal tax return.
  It is not a refund or a payment from us.
- It applies to voluntary tips, up to $25,000 a year, for 2025 to 2028.
  Higher earners get less.
- Service charges and automatic gratuities are wages, not tips,
  so they do not count.
- Social Security and Medicare are still taken from tips.
  State income tax depends on your state.
- Your 2026 W-2 shows your tips in Box 12 (code TP) and your job
  code in Box 14b. Ask your tax preparer how to claim it.

Then expect these questions in January, and answer them the same way every time:

This guide is general information, so check with a tax adviser for your situation.

Can TablePort handle this for you?

TablePort keeps tips voluntary at the register and gives your accountant the numbers.

1. Set your own tip prompts on the card reader, and choose whether the kiosk and QR order and pay show a tip screen. Keep a zero option on each, so the tips stay voluntary.
2. At close, cash, voids, comps and tips reconcile on one screen, and the daily report shows tips per staff member, a figure to check against the tips on each pay slip.
3. Use the accounting exports to send daily sales, tips and tax to your accountant or payroll provider.

One honest limit: TablePort does not run payroll and does not produce W-2s or occupation codes. Your payroll provider files the forms and assigns the codes. See the POS page.