IRS Issues Detailed Guidance on New Overtime Tax Deduction Including W-2 Reporting Requirements

The IRS released detailed guidance on the new overtime tax deduction, clarifying how workers can claim the benefit and what employers must report starting in 2026.

The deduction was established by the One, Big, Beautiful Bill Act. It applies to the premium portion of overtime pay, meaning the extra half of the time-and-a-half rate that workers earn for hours beyond 40 per week. The base pay for those hours is not deductible.

The maximum annual deduction is $12,500 for individual filers and $25,000 for those filing jointly. The deduction begins to phase out when modified adjusted gross income exceeds $150,000 for single filers or $300,000 for joint filers.

Starting in 2026, employers must report qualifying overtime compensation in box 12 of Form W-2 using code TT. If an employer identifies an error in the reported amount, they must file a Form W-2c and provide a corrected copy to the employee.

The deduction does not exempt overtime pay from gross income. Employers must continue to withhold federal income and employment taxes on these wages. Workers who want to adjust their withholding to reflect the deduction should submit an updated Form W-4 to their employer.

Federal employees can check their eligibility by looking at the FLSA Category block on Standard Form 50. An "N" in that field indicates nonexempt status, meaning the employee is eligible for overtime under the Fair Labor Standards Act.

Business owners who hold at least 20 percent equity in a company and are actively involved in management are generally considered exempt from FLSA overtime requirements and cannot claim the deduction.

The IRS guidance is available at irs.gov and covers additional scenarios including part-year employment, multiple employers, and situations where overtime pay is disputed.