On August 6, the Internal Revenue Service issued updated FAQs (FS-2026-13) on the deduction for qualified overtime compensation, commonly referred to as “No Tax on Overtime,” that was created by the One Big Beautiful Bill Act (OBBBA). The updated fact sheet supersedes the FAQs the IRS previously posted, deletes guidance that applied only to the 2025 tax year, and adds a new section addressing employer reporting, calculation, and withholding obligations for tax year 2026.
Background
The OBBBA established an income tax deduction for qualified overtime compensation for employees who are covered by and not exempt from the FLSA’s overtime requirement. The deduction is capped at $12,500 per return ($25,000 for joint filers) and phases out for higher earners. As CUPA-HR previously reported, earlier guidance from the IRS provided penalty relief for employers on 2025 reporting. That relief did not extend beyond tax year 2025, and the updated FAQs make clear that separate reporting is now required.
Notable Questions for Employers
The updated FAQs include a dedicated section — Topic E, “Information for Employers” — that explains how employers report and determine qualified overtime compensation. A brief summary of the questions from this section is included below.
- Mandatory W-2 reporting (Question 10). Beginning in 2026, employers must separately report qualified overtime compensation on Form W-2 in box 12 using code TT. The amount reported is the total qualified overtime paid, which is the FLSA-required premium in excess of the regular rate and which may exceed what the employee can ultimately deduct given the dollar caps. (The FAQ’s example: an employer should report the full $30,000 in code TT even though the deduction is limited to $12,500/$25,000.)
- Correcting errors (Question 11). If an employer discovers an error in box 12, code TT, it must file a Form W-2c with the Social Security Administration and furnish a corrected copy to the employee as soon as possible. Incorrect filings may trigger information-reporting penalties, with reduced penalties available for timely corrections.
- Calculating the amount (Question 12). Qualified overtime compensation is determined each workweek. For most employees, the general formula to calculate the qualified overtime compensation for the workweek is: FLSA hours worked over 40 in the workweek × one-half × the employee’s FLSA regular rate of pay.
- Defining the workweek (Question 13). A workweek is a fixed, regularly recurring 168-hour period (seven consecutive 24-hour periods). Each workweek stands alone, and hours cannot be averaged across two or more workweeks.
- Determining hours worked (Question 14). The regular rate and the overtime owed cannot be determined without knowing the number of hours actually worked in a given workweek. The FAQs direct readers to the Department of Labor (DOL)’s Fact Sheet #22 for more information about what time qualifies as “hours worked.”
- Calculating regular rate (Question 15). The FAQs clarify that an employee’s regular rate includes “all remuneration for employment paid to, or on behalf of, the employee” and is calculated by dividing the total pay for employment (except for the statutory exclusions) in any workweek by the total number of FLSA hours actually worked.
- Overtime beyond what the FLSA requires (Question 16). When an employer pays overtime not required by the FLSA, only the amount minimally necessary to satisfy the FLSA overtime requirements counts as qualified overtime compensation. The FAQs provide an example of an employer that pays overtime at two times the employee’s regular rate.
- Alternative computation methods (Question 17). The FAQs state that FLSA overtime-eligible employees whose overtime is determined by a provision in 29 USC § 207 other than 29 USC § 207(a) are paid qualified overtime compensation when compensation determined by that provision exceeds the regular rate. The document points to DOL fact sheets on overtime pay and FLSA enforcement for employees of hospitals or certain residential care facilities, public sector employees in fire protection and law enforcement, and employees of a state or interstate government agency who receive compensatory time off in lieu of cash overtime compensation.
- Compensatory time for state and local government employees (Question 18). According to the FAQs, for state and local government employees who bank “comp time” instead of taking cash overtime, the qualified overtime is treated as paid when they actually use that time off or cash it out at separation, not when they earn it. The FAQs provide the calculation for the amount of qualified overtime compensation paid for compensatory time earned for hours accrued that are taken or used and hours accrued that are paid out as wages.
In addition to the FAQs for employers, Topic F, “Information for Employees,” walks through different scenarios employees may face when determining the deductible amount of qualified overtime compensation for the taxable year.
HR professionals should review the IRS guidance to understand compliance requirements for the “No Tax on Overtime” deductions. CUPA-HR will keep members apprised of further developments as the IRS finalizes forms and instructions for the 2026 tax year.