In order to use Tracking Codes in UpSheets, they must first be enabled in Xero, as follows:
Select (from top left) Org > Settings > Payroll Settings
Under Payroll Tracking, select the Tracking Code you wish to use in the Timesheet Categories field and save.
You must disconnect Xero from Upsheets and reconnect for the change to take effect.
You will then be able to select Tracking Codes in UpSheets.