Starting in 2026, new federal guidance may change how certain tips and overtime wages are tracked and reported on employee Forms W-2. While payroll withholding is not changing, employers may need to review payroll setup to ensure earnings are coded correctly—especially for distinguishing qualified vs. non-qualified tips and qualified vs. non-qualified overtime for reporting purposes. 

Please note: Payroll withholding requirements have not changed. Qualified tips and overtime remain subject to regular tax withholding and payroll taxes. Any potential benefit related to the OBBBA will be handled by the employee on their individual tax return (Form 1040), if they meet applicable guidelines. 

Key Items to Know:

1)  Qualified Tips – W-2 Reporting

Certain tips must be tracked and reported as Qualified Tips, which will be reported on the employee’s W-2 (ADP system reporting may display this in the applicable reporting box as required). 

Qualified tips generally include: 

  • Voluntary / noncompulsory tips (e.g., a customer chooses to leave a tip for good service) 
  • Tips earned by an employee working in an occupation that customarily and regularly receives tips 

Non-qualified tips include: 

  • Mandatory gratuities / service charges 
  • Compulsory charges added to the bill 
  • Tip-like payments to employees in roles not considered tipped occupations under this provision 

✅ Action Item: Employers must ensure qualified vs. non-qualified tips are coded correctly in payroll. 

 

2) Qualified Overtime – W-2 Reporting

Certain overtime must be tracked and reported as Qualified Overtime, based on federal overtime standards. 

Qualified overtime generally includes: 

  • Overtime that meets federal OT rules, based on the workweek (commonly hours over 40 in a workweek) 

Non-qualified overtime includes: 

  • Overtime paid under a more generous policy (for example, overtime earned for hours over 8 in a day), which may be overtime for company policy purposes but may not qualify for this provision 

✅ Action Item: Employers should confirm how overtime is calculated and ensure payroll earnings codes align with qualified vs. non-qualified overtime. 

 

What Has Not Changed 

  • Withholding requirements have not changed 
  • All tips and overtime remain subject to required payroll withholding and applicable payroll taxes 
  • The OBBBA-related benefit, if applicable, will be claimed by the employee on their individual return (Form 1040) 

 

Steps for DHA ADP Clients (Effective for Payrolls with Check Dates 1/1/26 and Later) 

A) If you have tipped employees

Please ensure tips are being reported using the correct payroll earnings codes: 

1. Qualified tip amounts 

  • Tips entered using existing tip earnings codes (that may qualify under OBBBA) will be tracked and reported on the employee’s W-2 as required. 

2. Non-qualified tips 

  • Tips that do not qualify (such as mandatory service charges / gratuities) should be reported using the newly created “NQ” (non-qualified) tip earnings codes. 

3. Treasury Tipped Occupation Code (TTOC) 

  • For tipped employees, employers will need to select a Treasury Tipped Occupation Code (TTOC) for each employee in an occupation that customarily and regularly receives qualified tips. 
  • This is completed in ADP under:  People → select employee → Payroll Info → Tip Information 
  • These selections can be made before your first 2026 payroll. 

 

B) If you have hourly employees who earn overtime

Please ensure overtime earnings are coded correctly: 

1. Qualified overtime 

  • Hours reported in existing overtime and double time codes will be used to calculate the qualified premium portion of qualified overtime compensation. 
  • This amount is accumulated throughout the year and reported on the employee’s W-2 as required. 

2. Non-qualified overtime 

  • Overtime/double time that does not qualify should be recorded using the newly created “NQ” (non-qualified) overtime and double time earnings codes. 
  • These amounts will not be included in the qualified overtime reporting totals. 

3. New ADP report 

  • ADP will provide a new report: Qualified Overtime Compensation Summary, which shows the qualified premium portion of earnings per payroll that will be reflected on the W-2. 

 

If you have questions or would like us to review your setup before your first 2026 payroll, please reach out.