By Denise M. Holmes, CPA, Partner
Updated IRS guidance clarifies reporting requirements for the qualified overtime deduction beginning with 2026 tax year.
The IRS has updated its guidance on the qualified overtime deduction in Fact Sheet 2026-13, clarifying that beginning in 2026, employees may only claim the deduction for qualified overtime that is separately reported by their employer on Form W-2 or another applicable information return. The updated guidance replaces FAQs released earlier this year and provides additional information on reporting and correcting qualified overtime amounts.
Qualified overtime deduction basics
The One Big Beautiful Bill Act established a temporary deduction for qualified overtime compensation for tax years 2025 through 2028. Qualified overtime compensation generally includes only the premium portion of overtime pay required under the Fair Labor Standards Act, not the total compensation paid for the overtime work.
The deduction is limited to $12,500 for individual filers and $25,000 for joint filers. It begins to phase out for taxpayers with a modified adjusted gross income between $150,000 for individuals and $300,000 for joint filers.
New reporting requirements begin in 2026
The IRS provided transitional reporting relief for the 2025 tax year, but that relief does not continue into 2026. Starting in tax year 2026 through 2028, employers must separately report qualified overtime compensation on Form W-2, Box 12, using code TT.
Employees may claim the deduction for amounts properly reported on their Form W-2. If qualified overtime compensation is omitted, the employee cannot include that amount when calculating the deduction unless the employer issues a corrected Form W-2c.
The IRS has also addressed workers whose classifications differ under federal labor and tax laws. Workers considered employees under the FSLA but independent contractors for federal tax purposes may have qualified overtime compensation reported on Form 1099-MISC or Form 1099-NEC.
Correcting reporting errors
If an employer reports more qualified overtime compensation than an employee received, the employee may only claim the actual amount paid. If the employer understates or completely omits qualified overtime compensation, the employee must request a corrected Form W-2c. If the employer does not provide a correction, the omitted amount generally cannot be used to calculate the deduction.
What employers should know
Employers should review payroll processes to confirm qualified overtime compensation is being properly identified and reported. Accurate reporting will be especially important because an employee’s ability to claim the deduction will depend directly on the information provided by their employer.
Keiter’s tax professionals can help businesses understand new federal tax reporting requirements and how they may affect their payroll and compliance responsibilities. Contact your Keiter Opportunity Advisor to discuss how these changes may affect your payroll and reporting processes.
Source: Thomson Reuters Checkpoint®
About the Author
Denise M. Holmes, CPA, Partner
Denise serves a wide variety of industries with a major concentration in healthcare and medical practices. She shares her industry knowledge and tax expertise with physicians to assist them in reaching their personal and business financial goals. Some of her specialty areas with Keiter include consulting, compliance and tax research for individuals, partnerships, and S Corporations. She is the leader of Keiter’s Construction niche team.
More Insights from Denise M. HolmesThe information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.
