Qualified Overtime Compensation Reporting
Beginning with tax year 2026, employers must separately report qualified overtime compensation in box 12 of Form W-2 using code TT. The figure supports an employee deduction of up to $12,500 - and from 2026 onward, the amount you report is a hard ceiling on what the employee can claim.
If you report it wrong, the employee's only remedy is asking you for a corrected W-2. There is no self-help route.
This is a payroll data problem before it's a tax problem, and it's harder than it looks.
What actually qualifies?
Only the premium half of FLSA-required overtime. Not the whole overtime wage.
The computation is: hours over 40 in the workweek × one-half × the employee's FLSA regular rate.
Only federal overtime counts. Overtime that isn't required by the Fair Labor Standards Act - state law overtime, contractual overtime, overtime under a collective bargaining agreement - does not qualify. An employee who isn't eligible for FLSA overtime generates no qualified overtime regardless of what other rules require.
Only the statutory minimum counts. If you pay above the FLSA requirement, the excess doesn't qualify. The IRS example: an employee earning $20/hour works 50 hours and is paid double time for the 10 overtime hours - $400 of premium. Only $100 is qualified overtime (10 × 0.5 × $20). The other $300 is ordinary wages.
The deduction, briefly
| Cap | $12,500 per return; $25,000 joint |
| Phase-out begins | MAGI over $150,000 ($300,000 joint) |
| Phase-out rate | $100 of deduction lost per full $1,000 over the threshold |
| Tax years | 2025 through 2028 |
| Taxes affected | Income tax only |
Three things employers are asked about constantly, all with the same answer - no:
It is not "tax-free overtime." It's a deduction worth the employee's marginal rate, not the full amount. And the $12,500 caps the premium half, which corresponds to roughly $25,000 of gross overtime wages at time-and-a-half.
It does not reduce payroll taxes. Overtime remains fully subject to Social Security, Medicare, federal unemployment tax and income tax withholding.
You cannot reduce withholding to reflect it. An employee who wants less withheld must submit an updated Form W-4.
One technical correction worth making, because it's widely repeated wrong: this is not an above-the-line deduction. It's taken after AGI is determined, on Form 1040 line 13b. Available to non-itemizers, but it does not reduce AGI - which matters for every AGI-linked calculation, including this deduction's own phase-out.
What you have to report
For tax year 2026 and later:
| Form | Where | What |
|---|---|---|
| Form W-2 | Box 12, code TT | Total qualified overtime compensation |
| Form W-2 | Box 12, code TP | Qualified tips |
| Form W-2 | Box 14b | Treasury Tipped Occupation Code |
| Form 1099-NEC | Box 1d | Qualified overtime |
| Form 1099-MISC | Box 14 | Qualified overtime |
Report the total qualified overtime paid, even where it exceeds the employee's deduction cap. The cap is applied on the employee's return, not by you.
(Don't confuse the codes: TT is overtime, TP is tips, TA is something else entirely.)
The 2025 transition relief has ended
For tax year 2025, penalties for failing to separately report qualified overtime were waived, no forms were changed, and employees could compute their own figure using several permitted methods.
None of that carries into 2026. The relief was expressly limited to tax year 2025.
From tax year 2026, an employee may not claim any qualified overtime beyond what appears in box 12 code TT on their W-2. The self-calculation route is gone.
If your figure is wrong or missing, the employee's only remedy is a corrected W-2 from you. A substitute W-2 filed by the employee does not work - it isn't furnished under the provision the deduction requires. If you're unwilling or unable to issue the correction, the employee simply loses the deduction.
That turns a payroll data-quality issue into a direct employee-relations problem with a dollar value attached to it.
Why this is hard: the regular rate
Here's the trap. The premium is not half the base hourly rate. It's half the FLSA regular rate, which is a different and moving number.
The regular rate includes all remuneration for employment, minus specific statutory exclusions, computed per workweek: total non-excluded compensation divided by total hours actually worked.
Must be included: nondiscretionary bonuses, commissions, shift differentials paid as regular compensation, prearranged on-call pay.
May be excluded: genuinely discretionary bonuses - where both the fact and the amount are at the employer's sole discretion - gifts, expense reimbursements, paid leave, infrequent show-up pay, bona fide benefit plan contributions, and premium pay for weekend or holiday work at time-and-a-half or better.
A payroll system computing overtime hours × 0.5 × base rate will produce the wrong box 12 figure for any employee who receives a bonus, a commission or a shift differential.
Retroactive bonuses are the worst of it
Where a nondiscretionary bonus can't be tied to particular workweeks, it must be allocated across the bonus period by a reasonable and equitable method - which retroactively raises the regular rate for every workweek in that period, generating additional half-time due, and therefore additional qualified overtime that has to land in box 12.
A quarterly or annual bonus paid in January for the prior year does this across a W-2 boundary.
Multiple rates
An employee working two or more different jobs at different rates in the same workweek has a regular rate that is the weighted average of those rates - recalculated weekly as the hour mix changes.
State overtime
Overtime required by state but not federal law doesn't qualify. Applied to daily overtime rules: hours 9 through 12 in a day, on a week that stays under 40 hours, generate no qualified overtime, because federal law requires nothing. Double time produces qualified overtime only up to the federal half-time premium.
This follows directly from the general rule, but no published guidance names specific state regimes. Confirm before relying on it for a particular state.
The audit angle worth understanding
Box 12 code TT is, functionally, a published attestation of your FLSA overtime math - filed with the government and furnished to every non-exempt employee, every year.
That's a record that didn't previously exist. A TT figure that's implausibly low relative to reported hours is visible. An employee classified as exempt shows no TT figure at all - which is precisely the question a misclassification claim turns on.
(No agency has said it will use this data for wage and hour enforcement. But the record now exists and is discoverable.)
Worth knowing alongside it: the current federal salary threshold for the white-collar exemptions is $684 per week ($35,568 a year), with the highly compensated employee threshold at $107,432. The 2024 rule that would have raised these was vacated by the courts, and the regulations were formally restored to the earlier levels by a technical amendment effective 15 May 2026, which also eliminated the automatic updating mechanism. Any guidance citing $844 or $1,128 per week is out of date.
Wage and hour claims carry a two-year limitations period, three years for willful violations, with liquidated damages equal to the unpaid wages.
What to do now
- Determine whether your system can isolate the FLSA half-time premium separately from straight time, from non-FLSA overtime, and from premium paid above the federal minimum. Most cannot without configuration.
- Verify your regular rate calculation includes nondiscretionary bonuses, commissions and shift differentials.
- Decide how you'll handle retroactive bonus allocation, particularly across a calendar year boundary.
- Audit exempt classifications before the absence of a TT figure makes them conspicuous.
- Prepare for employee questions, which will arrive with the first 2026 W-2 and will mostly be "why isn't my overtime tax-free."
Frequently asked questions
Is overtime pay now tax-free?
No. It's a deduction of up to $12,500 on the premium half of federal overtime, worth the employee's marginal rate - and payroll taxes are unaffected.
Does the whole overtime payment qualify?
No. Only the premium half - hours over 40 × 0.5 × the regular rate.
Does state overtime qualify?
No. Only overtime required by federal law.
Does double time qualify?
Only up to the federal half-time premium. Anything above that doesn't.
Is the premium just half the hourly rate?
No. It's half the FLSA regular rate, which includes nondiscretionary bonuses, commissions and shift differentials.
Should we reduce withholding for it?
No. An employee who wants less withheld must file an updated W-4.
What if we don't report it?
From tax year 2026, the employee cannot claim more than the box 12 code TT amount. Their only remedy is a corrected W-2 from you.
Can an employee calculate it themselves?
For 2025, yes. For 2026 onward, no.
Where does it go on the W-2?
Box 12, code TT.
What about contractors?
Only in the rare case of someone who is an FLSA employee but treated as a contractor for tax purposes - 1099-NEC box 1d or 1099-MISC box 14.
This guide is general information about reporting requirements, not legal advice. Verify current deadlines, thresholds and penalty amounts against the issuing agency before you file.