No Tax on Tips Helpfor restaurant and salon owners
Your staff claims the deduction, but your payroll and your forms decide what they can prove. Here's what to set up for 2025 and 2026.
One check, three kinds of money
A single check can hold three things. Sales of the food or the service. A tip the guest chose. And a service charge the house added.
Sales stay in sales. A charged tip belongs to your staff, so it's owed to them until you pay it out, and it goes through payroll as reported tips. A service charge is your revenue, and it becomes wages when you pay it out.
When all three land in one account, your books and your W-2s stop matching. Separate pay items and separate accounts keep them straight.
Your 2026 W-2s change
Starting with 2026, box 12 with code TP shows the total cash tips each employee reported to you.
Box 14b shows the Treasury Tipped Occupation Code for the job. You can enter up to two codes. If any tips came from a job that isn't on the list, one of the codes must be 000.
Your staff uses those two boxes to figure the deduction. Ask your payroll provider now how they'll fill them in, so January isn't a scramble. The details are in the 2026 W-2 instructions.
If you pay contractors or chair renters
Starting with 2026, Forms 1099-NEC, 1099-MISC and 1099-K show tips separately, along with the occupation code.
If a booth renter's clients tip through your system, plan now for how those tips will be tracked and reported.
What you can do for 2025
The 2025 forms weren't changed to show tips separately, and the IRS gave employers penalty relief for 2025.
You can still help your staff. Give each person a separate statement, or a box 14 entry on the W-2, with their tip total. The IRS lets employees use that amount.
Notice 2025-69 lists the amounts employees can use for 2025, including box 7 and their Forms 4070.
The tip reporting you already do
Employees report cash tips of $20 or more a month to you in writing, by the 10th of the next month. You withhold income tax, Social Security and Medicare on those tips and report them on Form 941.
Reported tips go on the W-2 in boxes 1, 5 and 7. A large food or beverage business also files Form 8027 each year.
None of that changes. The new boxes are added on top.
How we help owners
We set up payroll on the provider you pick so tips, service charges and wages each have their own pay item. You run each payday.
We keep your books matching what payroll reports, and we check your point-of-sale tip screen and your large party policy.
Before year-end, we make sure your W-2s and 1099s will show the tip totals your staff needs. The first step is a free 30-minute call.