IRS Issues Guidance on New Overtime Pay Tax Deduction for 2026

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

The deduction was established by the One, Big, Beautiful Bill Act and applies to tax years 2025 through 2028. It allows eligible employees to deduct the premium portion of their overtime pay, which is the extra "half" in time-and-a-half compensation, from their taxable income.

For 2026, employers are required to report qualifying overtime compensation in box 12 of Form W-2 using code TT. Workers generally may only claim the deduction for amounts reported this way. If an employer understates the qualifying overtime amount, the employee must obtain a corrected W-2 from the employer.

The maximum deduction is $12,500 for individual filers and $25,000 for married couples filing jointly. The deduction begins to phase out for taxpayers with modified adjusted gross income above $150,000 for single filers or $300,000 for joint filers.

The deduction applies only to overtime pay mandated by the Fair Labor Standards Act for nonexempt employees. Workers who are exempt from FLSA overtime requirements, such as certain executive, administrative, and professional employees, do not qualify.

The deduction does not make overtime pay exempt from Social Security taxes or federal unemployment taxes. Employers must continue standard income tax withholding on overtime wages. Workers who want to adjust their withholding to account for the anticipated deduction can submit an updated Form W-4 to their employer.

Tax professionals said the new reporting requirement adds a layer of complexity for employers but provides clarity for workers trying to claim the benefit. They advised workers to review their pay stubs and confirm their employer is tracking overtime hours correctly.

The IRS said it would continue to update guidance as questions arise from employers and workers navigating the new rules.