The IRS has made changes to its guidance for employers and workers who claim the new income tax deduction for qualified overtime compensation, a temporary tax code change authorized by the One Big Beautiful Bill Act that is intended to provide relief to hourly workers.
OBBBA, which was signed on July 4, 2025, authorized the overtime deduction for tax years 2025, 2026, 2027, and 2028. Recognizing that employers and payroll processors lacked the administrative ability to quickly track and report this information on W-2 forms in time for the 2025 tax year, the IRS treated the first year as a “transitional period.”
For the 2025 tax year, the IRS did not penalize employers for failing to report overtime on W-2 forms, and workers were permitted to self-report their overtime by using paying stubs or other personal logs when doing their federal income taxes.
On Thursday, the IRS issued Fact Sheet FS-2026-13, which supersedes its previous guidance and now requires employers to report qualified overtime in Box 12 (Code TT) of W-2 forms for the 2026 tax year. Workers may no longer take the overtime deduction unless their overtime is shown in Box 12 of their W-2.
The deduction is capped at a maximum of $12,500 for individual taxpayers ($25,000 for joint filers) but phases out based on the taxpayer’s income. The deduction is reduced by $100 for every $1,000 in modified adjusted gross income exceeding $150,000 ($300,000 for joint filers).
The new fact sheet also clarifies that any employee who owns at least 20% equity interest in a business and who is actively engaged in its management is not eligible for overtime compensation for tax purposes.
Additionally, the fact sheet makes clear that qualified overtime compensation is subject to standard federal income tax withholding, and that employers may not reduce withholding on wages to account for the qualified overtime deduction unless the employee furnishes the employer an updated and valid Form W-4.
Employees should consider using the IRS’ Tax Withholding Estimator, which has been updated to allow employees to account for the deduction for qualified overtime compensation.
The IRS reminds employers that they may be subject to penalties for reporting inaccurate information in Box 12 of a W-2 form. If the employer makes a timely correction by issuing a Corrected Wage and Tax Statement, known as Form W-2c, to the affected worker, penalties against the employer could be reduced.
