Drive the stretch of Colleyville Boulevard between Glade and John McCain, and you’ll pass a dozen businesses this applies to. Sit-down restaurants, fast-casual spots, hair studios, nail salons, med spas, barbershops. Every one of them has staff who earn tips, work overtime, or both.
For 2025, the IRS gave everyone a pass on the new reporting. That pass expired. The W-2s you issue in January 2027 are the first ones where tips and overtime have to be broken out correctly, and the tracking that makes those numbers right has to happen during the pay period, not in December.
Here’s what you’re actually on the hook for.
Summary of the Tax Break
The One Big Beautiful Bill Act created two temporary federal income tax deductions, both running 2025 through 2028:
Qualified tips. Up to $25,000 per return, available to workers in occupations the IRS has designated as customarily tipped. The deduction phases out by $100 for every $1,000 of modified AGI above $150,000 (single) or $300,000 (joint).
Qualified overtime. Up to $12,500 for single filers, $25,000 for joint filers, with the same phaseout thresholds.
Both are income tax deductions, not exclusions. Social Security and Medicare still apply to every dollar, employee side and employer side. Federal income tax withholding doesn’t change either. Your payroll math is the same as it always was. What changed is the reporting.
Texas has no state income tax, so there’s no second layer to worry about here. That’s the one piece of good news.
The three new boxes on the 2026 W-2
Starting with 2026 wages, your Forms W-2 need:
- Box 12, code TP: total qualified tips
- Box 12, code TT: total qualified overtime compensation
- Box 14b: the employee’s Treasury Tipped Occupation Code (TTOC)
Box 14 was split into 14a and 14b specifically to make room for the occupation code. If you pay non-employees, the same information flows onto Forms 1099-NEC and 1099-MISC.
The part that catches people off guard: the W-2 controls the deduction. The IRS confirmed in its August 2026 fact sheet that an employee generally can’t deduct more overtime than what you reported in Box 12 code TT. If you understate it, that employee is stuck until you issue a corrected W-2c. Underreport across a 40-person staff, and you’ve got 40 angry conversations in February plus a stack of corrections.
Tips: what counts and what doesn’t
The final regulations came out in April 2026 and locked in a list of about 70 qualifying occupations. Restaurant and salon roles are well represented: servers, bartenders, bussers, hosts, cooks, food delivery workers, barbers, hairstylists, nail technicians, estheticians, massage therapists. Assistants and apprentices count if they do the same work as the primary role.
A tip is “qualified” only if the customer decided to leave it, and decided how much. That gives you a clean dividing line:
Counts: cash left on the table, tips added to a card or a Toast or Square prompt, tips distributed through a valid tip pool, tips a client hands a stylist directly.
Doesn’t count: the automatic 20% you add to parties of eight. The service charge on a private dining buyout. The mandatory gratuity on a bridal party booking six stylists on a Saturday morning. Anything paid in crypto.
Auto-gratuities and service charges are wages, full stop. They belong in Box 1, not Box 12 code TP. If your POS lumps them into the same tip bucket as voluntary tips, that’s the single most likely source of a wrong W-2 next year. Fix the configuration before you run another pay period.
One open item: the statute technically excludes tips earned in a specified service trade or business under Section 199A. The IRS has suspended enforcement of that exclusion until it issues separate guidance, so for now workers qualify regardless. Worth watching, not worth restructuring over.
Salons: booth renters are a different animal
If your stylists rent chairs, they’re self-employed. You’re not putting anything on a W-2 for them. They report tips on Schedule C and claim the deduction themselves, capped at their net business income. Their tip deduction can’t exceed what the business actually earned.
Where salon owners get into trouble is the in-between arrangement: someone who pays you rent but works your hours, uses your products, takes clients you booked, and charges the prices you set. That person is probably an employee, and if the IRS or the Texas Workforce Commission agrees, you owe back payroll taxes plus the tip and overtime reporting you never did. The new W-2 requirements make misclassification more visible than it used to be, because now there’s a specific box that’s conspicuously empty.
Overtime: only the premium half qualifies
This is where most employers get the number wrong.
Qualified overtime is only the extra amount required by the FLSA, not the whole overtime check. On time-and-a-half, that’s the “half,” not the “time and a half.”
A line cook earning $22 an hour works six overtime hours. He’s paid $198 for those hours. The qualified overtime is $66 because the premium is $11 per hour. Box 12 code TT gets $66, not $198.
If you pay double time as a holiday perk, only the FLSA-required half counts. The extra sweetener you added voluntarily doesn’t qualify.
Two traps specific to your industry
Tipped employees. Overtime for a tipped server is calculated on the full minimum wage, not the $2.13 cash wage. The regular rate is $7.25, the overtime rate is $10.88, and you subtract the tip credit from that. Computing overtime off $2.13 is one of the most common wage and hour violations in Texas restaurants, and it also produces the wrong Box 12 figure.
Commission stylists. If a stylist earns commission on services, her regular rate changes every week. Total earnings divided by total hours, then the half-time premium on top. You can’t just use her base hourly rate. Same goes for nondiscretionary bonuses and any service charges you distribute to staff, which have to be folded into the regular rate before you calculate the premium.
What to do between now and December
You’re about nine months into the first mandatory reporting year. Check these before you get any deeper:
- Pull a year-to-date report and see whether qualified tips and qualified overtime premiums are already broken out as separate line items. If they aren’t, you have a reconstruction project, and reconstructing nine months of tip data from POS exports is genuinely miserable.
- Call your payroll provider and ask directly whether Box 12 codes TP and TT will populate automatically from your existing pay codes, or whether someone has to map them. Don’t assume. Ask, and get the answer in writing.
- Assign a TTOC to every tipped employee. A server who also bartends may need more than one. This has to be in the payroll record, not in someone’s head.
- Audit your POS for the service charge problem. Auto-gratuity, banquet fees, and bridal party charges need their own category, separate from voluntary tips.
- Verify your overtime calculation for tipped and commissioned staff. If the regular rate is wrong, both your wage compliance and your W-2 are wrong.
- Decide what you’re telling your staff. They’ve heard “no tax on tips” and many of them think it means no withholding. It doesn’t. A short, plain explanation now beats a payroll office full of confused people in April.
The businesses that will have a smooth January are the ones treating this as a bookkeeping setup problem in September. The ones treating it as a W-2 problem will find out in January that it was never a W-2 problem.
If you run a restaurant or salon in Colleyville and you’re not sure your payroll setup is capturing the right numbers, a one-hour review of your pay codes and POS configuration now costs a lot less than corrected W-2s later.
