A worker earning $20 an hour who logs ten hours of overtime and receives double pay — $400 instead of $300 — might assume the whole premium is deductible under the federal government’s new overtime tax break. Fact Sheet FS-2026-13, published August 6, 2026 by the Internal Revenue Service, uses that exact math to show otherwise: only $100 of the $400 qualifies, because federal law compels just one and one-half times the regular rate, and the deduction tracks only the fraction the Fair Labor Standards Act actually requires an employer to pay. The update narrows a reading of the year-old break that many filers and employers had assumed covered the entire overtime paycheck.
The “Half” the IRS Will Count
Qualified overtime compensation, as the IRS’s updated Fact Sheet FS-2026-13 defines it, is not overtime pay in general. It is specifically the portion required under section 7 of the Fair Labor Standards Act that exceeds an employee’s regular rate of pay. For most FLSA overtime-eligible workers, that requirement is one and one-half times the regular rate for hours worked beyond 40 in a workweek, so it is the “half” portion — not the straight-time base pay folded into the same paycheck — that counts toward the deduction created under the One, Big, Beautiful Bill Act.
The fact sheet’s own worked example makes the distinction concrete. An employee who worked 50 hours in a week at a $20 hourly rate would be owed $300 in overtime pay under the FLSA’s baseline formula — ten overtime hours at $30 each, the statutory one-and-one-half rate. If that employer instead pays double time, $400 total for the ten hours, only $100 of it is qualified overtime compensation, because $300 was all the FLSA actually required. The remaining $100 the employer paid voluntarily gets no special tax treatment at all, regardless of how generous the policy sounds on a pay stub.
The same ceiling applies to overtime paid under a collective bargaining agreement or a state law that exceeds the federal minimum. FS-2026-13 states that only the portion “minimally necessary” to satisfy the FLSA is deductible, no matter what a union contract or company policy actually pays. An employee working under a contract that pays double time for holiday overtime still deducts only the FLSA-required premium, not the richer contractual rate, because the statute ties the deduction to the federal floor rather than to whatever an employer or bargaining unit negotiates above it.
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A Missing W-2 Code Erases the Deduction, Even When the Pay Was Real
The narrower definition arrives paired with a stricter reporting rule. Beginning with the 2026 tax year, employers must separately state each employee’s qualified overtime compensation on Form W-2, in box 12 using code TT, or on Form 1099-NEC or Form 1099-MISC in the rare case a worker counts as an employee under the FLSA but is treated as a contractor for tax purposes. That requirement did not apply for 2025, when separate reporting was optional under transition relief; the relief was a one-year accommodation and lapses with wages paid this year.
Under section 225(a) of the tax code, an employee may deduct only the amount of qualified overtime compensation that actually appears on a properly furnished Form W-2, not the amount actually earned. If an employer omits or understates the code TT figure and will not issue a corrected Form W-2c, the employee has no path to claim the difference; a substitute wage statement, Form 4852, does not satisfy the reporting requirement and cannot be used to determine the deduction. A worker stuck with a payroll department’s coding error simply loses that portion of the tax benefit.
Correcting the record runs entirely through the employer. FS-2026-13 instructs an employer that discovers a coding mistake to file Form W-2c with the Social Security Administration and furnish it to the worker, and warns that filing or furnishing an incorrect original can trigger information-reporting penalties under the tax code. For an employee, the only leverage is asking the employer to make that correction; there is no independent IRS process that lets a worker self-certify a higher overtime figure than payroll reported.
The Caps, the Income Phase-Out and Who Gets Nothing
None of the August clarifications touched the dollar limits Congress wrote into the law. The deduction still tops out at $12,500 of qualified overtime compensation per return, or $25,000 on a joint return, and phases out once modified adjusted gross income passes $150,000 for a single filer or $300,000 for a married couple filing jointly. Schedule 1-A of Form 1040 requires a taxpayer to enter the full code TT amount first, then apply those limits, so a worker whose W-2 shows $10,000 in qualified overtime compensation reports the entire figure before the schedule calculates how much of it survives as a deduction.
A separate group of workers gets no deduction at all, regardless of how many extra hours appear on a timesheet. Employees exempt from the FLSA’s overtime requirement — executives, administrative and professional staff paid a salary of at least $684 a week, along with outside sales employees and certain computer professionals — generate no qualified overtime compensation no matter what a company calls the extra pay on a pay stub, because the FLSA never required time-and-a-half for them in the first place. Employees who own at least a 20 percent equity stake in the business that employs them are excluded on the same theory: the statute treats them as management, not as FLSA overtime-eligible workers.
Taken together, the two rounds of guidance turn a benefit marketed broadly as ending taxes on overtime into something narrower and more conditional: a deduction worth, at most, the FLSA-required premium on hours actually logged past 40 in a week, capped by income, and entirely dependent on an employer correctly coding a single box on a wage statement. For a worker who assumed an entire overtime paycheck qualified, the August update is the moment that assumption gets corrected, not by any change in the underlying law, but by the IRS finally spelling out how narrowly the deduction was always written.
This article was researched and drafted with the assistance of artificial intelligence.
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