{"id":959,"date":"2026-11-04T18:44:12","date_gmt":"2026-11-04T18:44:12","guid":{"rendered":"https:\/\/pbspay.com\/news\/?p=959"},"modified":"2026-11-04T18:45:15","modified_gmt":"2026-11-04T18:45:15","slug":"irs-qualified-overtime-deduction-2026-reporting-requirements","status":"publish","type":"post","link":"https:\/\/pbspay.com\/news\/2026\/11\/04\/irs-qualified-overtime-deduction-2026-reporting-requirements\/","title":{"rendered":"IRS Clarifies Overtime Deduction and 2026 Reporting Requirements"},"content":{"rendered":"
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Recent IRS guidance has brought important clarity to the qualified overtime deduction, introducing new payroll reporting obligations that employers need to understand and prepare for now. With the 2026 tax year deadline approaching faster than it may seem, taking action early will help businesses avoid compliance headaches and ensure their employees receive the full benefit of this deduction.<\/p>\n\n\n\n

What Is the Qualified Overtime Deduction?<\/h2>\n\n\n\n

Not all overtime pay qualifies for this deduction – and understanding the distinction is critical. The qualified overtime deduction applies only to the additional “half” portion of time-and-a-half overtime pay required under the Fair Labor Standards Act (FLSA). In other words, if an employee earns $20 per hour and receives $30 per hour for overtime, only the extra $10 — the “half” above their regular rate — is considered qualified overtime compensation for purposes of this deduction.<\/p>\n\n\n\n

This distinction matters both for employees claiming the deduction and for employers who must accurately track and report qualified amounts. Overtime compensation that falls outside FLSA requirements, such as voluntary overtime pay above the statutory minimum, may not qualify.<\/p>\n\n\n\n

New Form W-2 Reporting Requirements Starting in 2026<\/h2>\n\n\n\n

Beginning with tax year 2026, employers are required to separately report qualified overtime compensation on Form W-2, Box 12, using code TT<\/strong>. This is a new reporting requirement, and payroll systems will need to be configured to capture and distinguish qualified overtime from total overtime compensation well in advance of the reporting deadline.<\/p>\n\n\n\n

Importantly, employers must report the full qualifying amount of overtime compensation — even if that amount exceeds the employee’s individual deduction limit. The reporting obligation is not capped to the deduction threshold; it reflects the total qualified overtime paid during the year.<\/p>\n\n\n\n

Deduction Limits and Phase-Out Thresholds<\/h2>\n\n\n\n

For eligible taxpayers, the qualified overtime deduction is available at the following levels:<\/p>\n\n\n\n