IRS Releases Full Rules for No Tax on Overtime Deduction Including W-2 Reporting

The IRS released comprehensive guidance on the new "No Tax on Overtime" deduction, established under the One Big Beautiful Bill Act. The rules clarify which workers qualify, how much they can deduct, and what employers must report.

The deduction applies only to the premium portion of overtime pay, meaning the extra half-pay above the regular rate required by the Fair Labor Standards Act. If an employer voluntarily pays double time when only time-and-a-half is required, only the FLSA-mandated portion qualifies.

Workers who are exempt from FLSA overtime requirements, including certain executive, administrative, and professional employees, do not qualify for the deduction. Employees who own at least a 20 percent equity stake in a business and participate in its management are also ineligible.

The annual deduction cap is $12,500 for individual filers and $25,000 for married couples filing jointly. The deduction phases out when modified adjusted gross income exceeds $150,000 for individuals or $300,000 for joint filers. Married taxpayers must file jointly to claim it.

Starting in 2026, employers must report qualifying overtime pay in Box 12 of Form W-2 using code TT. Employees can only claim the deduction for amounts their employer reports. If an employer understates the qualifying amount, the worker must request a corrected W-2c. The IRS will not accept Form 4852 as a substitute.

Overtime pay remains subject to federal income tax withholding, Social Security, and other employment taxes. Workers who want to adjust their withholding can submit an updated Form W-4 using Step 4(b).