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Impact of the No Tax on Tips provision to QuickBooks Payroll

by Intuit•1066• Updated 2 weeks ago

The One, Big, Beautiful Bill (OB3), also known as the “Working Families Tax Cut Act,” became law on July 4, 2025 as Public Law 119-21.  The tax breaks received from this act will be taken when individuals file their personal income taxes. There are no changes to the tax withholding calculated on paychecks. 

The rules for tracking and reporting tip income changes for tax years 2026-2028.  These tracking and reporting rules will require changes to how some tips are entered on paychecks. 

Changes to tip tracking and reporting

The IRS recognizes two types of tips:  Qualified, and Non-qualified

  • Qualified tips are voluntary cash or charged tips received from customers or through tip sharing.
  • Non-qualified tips include some service charges and automatic gratuities. For example, an 18% charge is automatically added to large parties that is later distributed to staff. If the charge is added with no option for the customer to modify it, the amounts distributed to the workers from it aren't qualified tips.

Treasury Tipped Occupation Code (TTOC)

The (TTOC) is a three-digit code assigned by the US Department of Treasury and the IRS that identifies jobs which customarily and regularly receive tips. It is required to be reported on a tipped employee’s W-2 starting in tax year 2026.  This code will be available in QuickBooks in mid 2026.

  • Any employee who isn't assigned a code, or who doesn't work in one of the codes accepted by the IRS will have all tip amounts reported as Non-qualified.

Track tips in QuickBooks:

Tip TypePay Type UsedW-2 Reporting (Starting Tax Year 2026)
Qualified tipsUse existing pay types:
Cash Tips
Paycheck Tips pay types. 		W-2,  Box 12, Code TP
Non-qualified tipsTwo new pay types have been created:
Non-qualified Cash Tips
Non-qualified Paycheck Tips.		Don’t report separately on the W-2

To learn how to set up pay types for non-qualified tips, see Pay and report tips.

Tip TypePay Type UsedW-2 Reporting (Starting Tax Year 2026)
Qualified tipsExisting tax tracking type:

Reported Tips.

Any payroll items you are currently using with that tax tracking type will automatically become qualified tips. 		W-2,  Box 12, Code TP 
Non-qualified tipsA new tax tracking type has been made available for Non-qualified Tips.Non-qualified Tips don't report separately on the W-2

To learn how to set up pay types for non-qualified tips, see Pay and report tips.

Frequently Asked Questions

We don't have all of the information necessary to accurately report qualified vs. non-qualified tip amounts in Box 14 of the W-2 for 2025.  The IRS guidance lists Box 14 as a voluntary option for reporting these provisions of the bill for 2025. 

The IRS also recommends that employees use tip items on their last pay stub of the year or Box 7 on their 2025 W-2.  The IRS advises employers to provide amounts of any non-qualified tips in a separate statement, where applicable. This information may be available within the Point of Sale system used for receiving tips from customers.

QuickBooks Online Payroll and QuickBooks Desktop Payroll Assisted: If you don’t already provide pay stubs to employees, give them their final pay stub of the year.  Alternatively, you can invite employees to use our online pay stub and W-2 program, QuickBooks Workforce, where they can download any of their pay stubs.

QuickBooks Desktop Payroll Enhanced:  In addition to providing employees with their final pay stub of the year or inviting them to use QuickBooks Workforce, you may edit each W-2 to add an amount to Box 14 while generating your W-2s for 2025. 

The tax break for individuals comes when they file their income tax return at the end of the year.  Tips are still taxable on paychecks.  Employees may provide an updated Form W-4 if they would like to change the taxes deducted from their paychecks.

You can edit prior paychecks to move amounts between items.. As long as you aren’t changing the total amount, there will be no impact to the employee’s taxes or net pay.

Additionally, you may be able to fix things on future paychecks by reducing the amount entered on one Tips pay item and increasing the amount entered on another Tips pay item.

You will need to add the “non-qualified cash tip” and “non-qualified paycheck” tip items to the employee and report their tip amounts using those items.  Paycheck treatment of these items is the same as the Qualified items, but amounts entered in these pay types will be reported as “Non-qualified” amounts on the employee’s 2026-2028 W-2 in Box 12.  These amounts aren't allowed toward the tip tax deduction when the employee files their personal income taxes.

Note: You will also need to select “employee does not work in a qualifying job/role” from the Treasury Tipped Occupations code selection, when available in QuickBooks.

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