For restaurants and other tipped businesses, “no tax on tips” has created more questions than answers, and employers are the ones responsible for getting the details right.

Like the overtime provision, “no tax on tips” is often misunderstood. It is a temporary federal income-tax deduction for eligible employees, not a tax exemption, and it does not eliminate an employer’s tip reporting or withholding duties.

Here is what employers actually need to do.

What the Tips Deduction Really Is

The One Big Beautiful Bill Act created a federal income-tax deduction for qualified tips for tax years 2025 through 2028. Eligible employees can deduct up to $25,000 in qualified tips per return.

The deduction phases out for higher earners, beginning at $150,000 of modified adjusted gross income for single filers and $300,000 for joint filers. Employees claim it on their individual tax returns.

Tips are not tax-free. They remain subject to Social Security and Medicare (FICA) taxes and to income-tax withholding, exactly as before.

Which Tips Actually Qualify

Only tips earned in occupations that customarily and regularly received tips qualify. Treasury has published a list of eligible tipped occupations, and employees must fall within one of those occupations to claim the deduction.

Just as important is what does not qualify: mandatory service charges and automatic gratuities are treated as wages, not tips. If your establishment adds an automatic charge for large parties, those amounts are regular wages subject to full withholding, and they are not eligible for the tips deduction.

What Employers Must Still Do

The employer’s core responsibilities have not gone away. Employees must still report their tips, and employers must still withhold income and payroll taxes on reported tips and pay the employer share of FICA.

In other words, day-to-day tip handling and withholding continue as usual. What’s new is the reporting.

New W-2 Reporting: Code TP and Box 14b

Beginning with the 2026 tax year, employers must separately report tip information on the Form W-2. Qualified cash tips reported to the employer go in the new Box 12, Code TP.

In addition, employers must report a tipped employee’s occupation using the new Box 14b, “Treasury Tipped Occupation Code(s),” which allows up to two codes per employee. These codes help confirm whether the employee works in an occupation eligible for the deduction.

Accurate occupation coding and tip tracking throughout 2026 are what make clean year-end reporting possible.

A Note for Illinois Restaurants and Employers

Because ProPayHR serves tipped businesses throughout Illinois, this is worth emphasizing: this is a federal deduction, and as of now, Illinois has not conformed to it.

Tip income generally remains fully subject to Illinois state income tax, even for employees who qualify for the federal deduction. Setting the right expectations with tipped staff is part of handling this change well.

Payroll and HR Expertise from ProPayHR

At ProPayHR, payroll isn’t just a task. It’s a responsibility.

Tip reporting has always been one of the more detailed parts of restaurant payroll, and the new rules add another layer. ProPayHR helps Illinois restaurants and other tipped employers determine what qualifies, apply the correct occupation codes, and report everything accurately on the 2026 W-2.

When your payroll includes tips, you need a partner who handles the details. Contact ProPayHR at 847-905-3000 or visit propayhr.com to make sure your tip reporting is ready for 2026.

“No tax on overtime” is one of the most misunderstood phrases in payroll right now, and the confusion can create real problems for employers who take it literally.

Despite how it sounds, “no tax on overtime” does not mean overtime is tax-free, and it does not remove any of an employer’s payroll tax responsibilities. It is a federal income-tax deduction for employees, not an exemption from payroll taxes.

Understanding that difference is essential, because the employer’s obligations have actually increased, not decreased.

What “No Tax on Overtime” Actually Is

The One Big Beautiful Bill Act created a temporary federal income-tax deduction for qualified overtime compensation, available for tax years 2025 through 2028. Eligible employees can deduct a limited amount of overtime pay when they file their individual returns.

The deduction is capped at $12,500 for single filers and $25,000 for joint filers, and it phases out for higher earners beginning at $150,000 of modified adjusted gross income for single filers and $300,000 for joint filers.

Importantly, only the overtime premium qualifies, not the entire overtime paycheck.

Only the Overtime Premium Counts

The deduction applies to the “extra half” of time-and-a-half pay required under the Fair Labor Standards Act, meaning the amount paid above the employee’s regular rate.

Overtime paid because of a contract, collective bargaining agreement, or company policy that goes beyond what the FLSA requires generally does not qualify. This distinction is one of the biggest sources of reporting errors, and it is the employer’s job to separate qualifying premiums from everything else.

Payroll Taxes Still Apply, in Full

This is the part employees and employers cannot afford to misunderstand. Overtime pay remains fully subject to Social Security and Medicare (FICA) taxes, for both the employee and the employer.

Overtime also remains subject to federal income-tax withholding. The IRS did not change its withholding tables for this deduction, which means most employees will see the benefit when they file their return, not in their regular paychecks.

For employers, nothing about calculating, withholding, or depositing payroll taxes on overtime has changed.

What Employers Must Now Do: Track and Report

What has changed is reporting. Beginning with the 2026 tax year, employers must separately report qualified overtime compensation on the Form W-2 using new Box 12, Code TT.

To do that accurately, overtime premiums need to be identified and tracked in your payroll system throughout the year. Trying to reconstruct that information at year-end is difficult and error-prone, and incorrect W-2s can lead to penalties and corrections.

A Note for Illinois Employers

Because ProPayHR works with employers across Illinois, this point matters locally: this is a federal deduction, and as of now, Illinois has not adopted it.

That means overtime pay generally remains fully subject to Illinois state income tax, even when an employee qualifies for the federal deduction. Employees shouldn’t expect “no tax on overtime” to reduce their Illinois taxes, and employers should be prepared to explain the difference.

Payroll and HR Expertise from ProPayHR

At ProPayHR, payroll isn’t just a task. It’s a responsibility.

The “no tax on overtime” rules are a perfect example of how a simple-sounding change can create complex new responsibilities for employers. ProPayHR helps Illinois businesses across many industries sort out exactly what qualifies, configure payroll to track it, and report it correctly.

When the rules get complicated, your business needs payroll expertise it can count on. Contact ProPayHR at 847-905-3000 or visit propayhr.com to make sure your overtime reporting is handled right.

The 2026 Form W-2 brings the most significant wage-reporting changes employers have seen in years, and the time to prepare is before year-end, not in January.

On January 9, 2026, the IRS finalized the 2026 Form W-2, adding new reporting fields required by the One Big Beautiful Bill Act (OBBBA). These changes first apply to the W-2s you will issue in January 2027 for the 2026 tax year, which means the payroll data behind them is being created right now, throughout 2026.

If your payroll system isn’t already tracking the new information, year-end could become far more complicated than it needs to be.

What Changed on the 2026 Form W-2

The updates are tied directly to two OBBBA provisions commonly described as “no tax on tips” and “no tax on overtime,” along with a new type of savings account. To support how employees claim these benefits on their individual tax returns, the IRS added new codes and reorganized part of the form.

The result is a W-2 that captures more detail than ever about how certain wages were earned.

New Box 12 Codes: TP, TT, and TA

Box 12 now includes three new codes:

Code TP reports the total amount of cash tips reported to the employer that may be eligible for the new tips deduction.

Code TT reports the total amount of qualified overtime compensation.

Code TA reports employer contributions made under a Section 128 “Trump account” contribution program.

Employees use these amounts to calculate their deductions when they file their returns, so the figures need to be accurate and consistent with the rest of your payroll records.

Box 14 Is Now Split Into 14a and 14b

Box 14 has been divided. Box 14a is labeled “Other” and continues to handle the items employers have always reported there, such as state disability insurance, union dues, or educational assistance.

Box 14b is new. It is labeled “Treasury Tipped Occupation Code(s),” and employers use it to report up to two codes identifying a tipped employee’s occupation. These codes help determine whether an employee works in an occupation eligible for the qualified tips deduction.

Why 2025 and 2026 Are Different

One of the most common points of confusion is timing. The 2025 Form W-2 did not include these new boxes or codes. For the 2025 tax year, the IRS provided transition relief and did not require employers to separately report qualified tips or overtime on the W-2.

Beginning with the 2026 tax year, that changes. The new codes and occupation reporting become part of the standard W-2, and getting them right is now part of year-end compliance.

What This Means for Year-End Payroll

Accurate year-end reporting starts long before December. To be ready, employers generally need to be capturing the right data all year: identifying qualified overtime premiums, tracking reported tips, and assigning the correct occupation codes to tipped employees.

Incorrect or missing W-2 information can carry real consequences. Information-return penalties can reach hundreds of dollars per form, and corrections create additional administrative work that is far more time-consuming than reporting the information correctly the first time.

That is why the smartest move is to confirm now, while there is still time in the year, that your payroll process is set up to produce clean, accurate 2026 W-2s.

Payroll Reporting Expertise from ProPayHR

At ProPayHR, accurate payroll reporting isn’t just a year-end task. It’s a year-round responsibility.

As an Illinois-based payroll and HR partner serving businesses across a wide range of industries, ProPayHR helps employers keep up with changing reporting requirements like the 2026 W-2 updates, so nothing gets missed when it matters most.

From day-to-day payroll processing to complex year-end reporting, ProPayHR helps businesses stay accurate, stay compliant, and stay focused on running their company.

The 2026 W-2 changes are coming. Make sure your payroll is ready before year-end. Contact ProPayHR at 847-905-3000 or visit propayhr.com to talk through what these updates mean for your business.

Employers that provide paid family and medical leave may have a valuable federal tax opportunity to consider in 2026.

On September 23, 2026, the Internal Revenue Service highlighted significant enhancements to the Employer Credit for Paid Family and Medical Leave. Among the most important changes, the federal tax credit is now permanent, employee eligibility has been expanded for purposes of the credit, and employers have an additional way to calculate the credit.

For business owners, this raises an important question: Could your company qualify for the 2026 Paid Family and Medical Leave Tax Credit?

What Is the Employer Paid Family and Medical Leave Tax Credit?

The Employer Credit for Paid Family and Medical Leave is a federal general business tax credit available to employers that meet the applicable requirements and provide qualifying paid family and medical leave.

Unlike a tax deduction that generally reduces taxable income, a tax credit can reduce an employer’s federal tax liability, subject to the applicable tax rules and limitations.

The credit was originally enacted as a temporary provision. Changes to federal law enacted in 2025 made the Section 45S credit permanent, meaning it no longer has the scheduled expiration date that previously applied.

Who Benefits From the Paid Family and Medical Leave Tax Credit?

The federal tax credit goes to the qualifying employer, not directly to the employee.

That distinction is important.

The employer receives the potential tax benefit for providing qualifying paid family and medical leave. Employees can benefit from having access to paid leave that allows them to continue receiving income while taking qualifying time away from work.

In other words, the federal government is providing a financial incentive for qualifying employers to offer paid family and medical leave benefits.

How Much Is the 2026 Paid Family and Medical Leave Tax Credit?

Eligible employers may qualify for a general business tax credit ranging from 12.5% to 25% of qualifying wages paid to qualifying employees for up to 12 weeks of family and medical leave per taxable year.

Under the wage-based method, the credit generally begins at 12.5% when the employer provides qualifying leave pay equal to 50% of an employee’s normal wages. The credit percentage increases as the percentage of wages paid during qualifying leave increases, subject to the applicable requirements and maximum credit.

A Simple Paid Leave Tax Credit Example

Suppose an eligible employer provides qualifying paid family or medical leave to an eligible employee.

If the employer continues paying qualifying wages while that employee is on leave and meets the other requirements of Section 45S, a percentage of those qualifying wages may potentially be claimed by the employer as a federal general business tax credit.

The exact credit depends on how much of the employee’s normal wages are being replaced and other applicable requirements.

This is why accurate payroll records can become extremely important. Employers need reliable information concerning employee wages, length of service, hours worked and qualifying leave.

What Changed for the Paid Leave Tax Credit in 2026?

The 2026 changes substantially expand the usefulness of the credit for some employers.

According to the IRS, significant enhancements include:

• The credit is now permanent.
• Employee eligibility for purposes of the credit has been expanded. Employers may be able to claim the credit with respect to qualifying employees who have completed at least six months of service.
• Certain part-time employees may qualify. The expanded provisions include employees who customarily work at least 20 hours per week.
• Employers have a new premium-based method. Qualifying employers may potentially calculate the credit using certain premiums paid for qualifying paid family and medical leave insurance policies.
• State and local paid-leave mandates can affect eligibility. Certain leave provided under state or local mandates may count toward determining eligibility for the federal credit, although amounts required under those mandates generally do not count toward calculating the federal credit itself.

Employers Can Now Have Two Ways to Claim the Credit

One of the most significant changes for 2026 is the addition of another method for calculating the credit.

Wage-Based Paid Leave Tax Credit

Under the wage-based method, the credit is based on qualifying wages an employer pays while an employee is taking qualifying family and medical leave.

Premium-Based Paid Leave Tax Credit

Under the new premium-based method, an employer may potentially calculate the credit based on qualifying premiums paid or incurred for an insurance policy that provides paid family and medical leave benefits.

The availability of these two approaches means employers should understand how their paid-leave benefits are structured before determining how the credit may apply to their organization.

What Types of Family and Medical Leave May Qualify?

Qualifying family and medical leave can include leave associated with circumstances such as:

• The birth of a child and care for the newborn child.
• Adoption or placement of a child for foster care.
• An employee’s own serious health condition.
• Caring for a spouse, child or parent with a serious health condition.
• Certain qualifying circumstances involving a family member serving in the Armed Forces.
• Caring for certain covered servicemembers with a serious injury or illness.

Employers should review the specific federal requirements applicable to their circumstances rather than assuming that every form of paid time off qualifies for the credit.

Paid Family Leave Tax Credit Eligibility Is Not the Same as FMLA Eligibility

This is an important distinction for employers.

The federal Family and Medical Leave Act (FMLA) generally provides eligible employees of covered employers with job-protected leave for qualifying family and medical reasons. Federal FMLA leave itself may be unpaid, although employer-provided paid leave can sometimes run concurrently with FMLA leave.

The eligibility rules governing an employee’s right to FMLA-protected leave are not necessarily the same as the rules used to determine whether an employer can claim the Section 45S tax credit.

For example, the Department of Labor states that employee eligibility for FMLA generally includes requirements involving 12 months of employment, at least 1,250 hours of service during the preceding 12 months and employment at a location where the employer has at least 50 employees within 75 miles.

By contrast, the enhanced Section 45S tax credit can apply with respect to certain qualifying employees after six months of service and includes provisions concerning certain part-time employees.

Employers should therefore avoid assuming that FMLA eligibility and eligibility for the federal paid leave tax credit are interchangeable.

How State and Local Paid Leave Laws Affect the Federal Tax Credit

Employers operating in jurisdictions with state or local paid-leave requirements have another layer to consider.

Under the enhanced federal rules, leave provided pursuant to certain state or local mandates may count toward determining whether an employer satisfies eligibility requirements for the federal credit.

However, amounts required to be paid under state or local law generally cannot be included in the calculation of the federal credit itself.

This distinction can be particularly important for employers with employees working in multiple states or municipalities.

Is the Paid Family and Medical Leave Tax Credit Really Permanent?

The word “permanent” has a specific meaning in this context.

Previous versions of the Section 45S credit had expiration dates. Federal legislation enacted in 2025 removed the scheduled termination of the credit, making it a permanent provision of the Internal Revenue Code.

That does not mean federal tax law can never change again. Congress can amend federal tax statutes through future legislation. However, the credit no longer automatically expires on a predetermined date under current law.

Why Accurate Payroll Records Matter for Employers Claiming the Credit

The enhanced credit illustrates how closely payroll, human resources, employee benefits and tax administration can be connected.

Depending on the method used and an employer’s circumstances, information involving employee wages, hours worked, length of service, leave taken and benefits can become important when evaluating eligibility and maintaining appropriate records.

That means payroll isn’t simply about getting money into an employee’s bank account every payday.

Accurate payroll data can become an important part of an employer’s broader HR, benefits and payroll infrastructure.

Should Your Business Review Its Paid Family and Medical Leave Policy?

With the expanded rules now applicable, 2026 is a good time for employers that provide paid leave to review how those benefits are structured and administered.

Questions employers may want to consider include:

• Does our company currently provide paid family or medical leave?
• Which employees may qualify under the current federal tax credit rules?
• Are employee service dates and hours being tracked accurately?
• Are qualifying leave payments clearly documented through payroll?
• Do we use an insurance policy to provide paid family and medical leave benefits?
• How do state or local paid-leave requirements affect our organization?
• Do our payroll and HR systems provide the records needed to evaluate the credit?

Employers should work with their tax and legal professionals to determine whether their particular paid-leave program qualifies for the federal credit and how the applicable rules should be applied.

Payroll and HR Expertise from ProPayHR

Changes involving payroll, employee benefits, paid leave and workforce requirements can quickly become complicated, particularly when several areas of a business overlap.

That’s where experienced payroll and human resources support becomes valuable.

ProPayHR provides professional payroll and HR solutions backed by extensive industry knowledge and experience. We help businesses simplify payroll administration, maintain accurate employee and payroll information, manage HR responsibilities and keep pace with an evolving workforce environment.

Whether your company is reviewing paid-leave policies, managing payroll, administering employee information or addressing increasingly complex HR responsibilities, ProPayHR brings together payroll and human resources expertise to help businesses manage their workforce with greater confidence.

Tax credits such as the Employer Credit for Paid Family and Medical Leave also demonstrate why accurate payroll and HR administration matter. When regulations change or new opportunities become available, businesses need reliable information to understand how those changes may affect them.

For professional payroll and HR support, turn to the experienced team at ProPayHR.

This article is provided for general informational purposes and should not be considered tax or legal advice. Businesses should consult with their tax or legal professionals regarding their eligibility for tax credits and the application of federal, state and local requirements.

Government Resources and Sources

Internal Revenue Service (IRS): Employer Credit for Paid Family and Medical Leave, including the September 23, 2026 IRS announcement and current guidance regarding the enhanced Section 45S credit.

U.S. Department of Labor: Family and Medical Leave Act guidance, including employee eligibility, qualifying reasons for leave and FMLA employee protections.