Beginning with the 2026 tax year, employers are required to separately report qualified overtime compensation on Form W-2 using a new code, and the Internal Revenue Service has already replaced the FAQ guidance it issued when the deduction first took effect. Fact Sheet FS-2026-13, published August 6, superseded FS-2026-01 from January, deleting rules that applied only to the 2025 tax year and adding detailed instructions for how employers must report, withhold and correct the new overtime deduction going forward. The deduction created under the One, Big, Beautiful Bill Act is capped, phased out at higher incomes, and now conditioned entirely on how an employer files a W-2.
Form W-2, Box 12, Code TT Becomes Mandatory
Starting in tax year 2026, an employer must report the full amount of an employee’s qualified overtime compensation on Form W-2 using box 12, code TT, regardless of how much of that amount is ultimately deductible under the law’s separate income limits. Independent contractors receive the same information on Form 1099-NEC, box 1d, or Form 1099-MISC, box 14, though the fact sheet notes that circumstance is rare, since overtime required under the Fair Labor Standards Act is, by definition, an employee protection.
The reporting requirement is not cosmetic. Under the law, an employee can deduct qualified overtime compensation only to the extent it appears on a properly furnished Form W-2, so an employer’s omission or understatement directly limits what a worker can claim, even if more overtime was actually earned. An employee who spots an error must request a corrected Form W-2c from the employer; a substitute form completed without the employer’s cooperation does not satisfy the reporting requirement and cannot be used to support the deduction.
The deduction does not exempt overtime pay from other payroll taxes. Qualified overtime compensation remains part of gross income and stays subject to federal income tax withholding, Social Security tax and Medicare tax the same as any other wages; the deduction only reduces the income tax calculated on the return itself, not the amount withheld from each paycheck throughout the year.
Eligibility for the deduction follows the Fair Labor Standards Act’s own overtime rules rather than any employer policy. An employee must be both covered by the FLSA and not otherwise exempt from its overtime requirement, a distinction that excludes many salaried professionals, executives and business owners holding at least a 20% equity stake, even when an employer voluntarily pays them overtime.
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Why the IRS Replaced Its January Guidance
The IRS announced the update August 6 in IR-2026-88, stating that Fact Sheet FS-2026-13 revises FS-2026-01, issued in January 2026. The January version reflected the deduction’s first partial year, when a separate 2025 notice gave employers and workers latitude to calculate the deduction even without a dedicated line on the 2025 Form W-2. That relief was specific to the 2025 tax year and does not carry into 2026, so the August fact sheet strips out the transition-year language entirely and replaces it with the compliance framework that governs the deduction going forward.
The revision adds substantial new material: a formula employers must use to compute qualified overtime compensation each workweek, instructions for correcting a Form W-2 that misreports the code TT amount, and a section addressing federal employees covered by the Office of Personnel Management’s separate overtime rules rather than the private-sector Fair Labor Standards Act framework. None of that existed in the January version, which is why the agency describes FS-2026-13 as a full update rather than a minor correction.
Because search engines and tax software often continue to surface the earlier fact sheet by date or title, the agency keeps prior versions posted on IRS.gov specifically so a taxpayer who relied on outdated guidance can locate the version they used. That housekeeping detail carries real weight for the deduction’s second year, since a worker or preparer who calculates the deduction using January’s now-superseded rules risks a mismatch with what an employer actually reports on the 2026 Form W-2.
The Deduction’s Dollar Limits and Who Phases Out
The overtime deduction itself is capped separately from the reporting mechanics. An individual filer may deduct up to $12,500 of qualified overtime compensation earned during the year, doubling to $25,000 for a married couple filing jointly, and the deduction shrinks for taxpayers whose modified adjusted gross income exceeds $150,000 for an individual return or $300,000 for a joint return.
Because the full, unreduced amount of overtime pay is what appears in box 12 under code TT, not the smaller, capped amount a taxpayer ultimately deducts, a worker who earned well over the deduction ceiling will still see the larger figure on the wage statement. Schedule 1-A of Form 1040 is where the deduction limits and the income phase-out are actually applied, using the box 12 figure as the starting point rather than the final answer.
The practical effect for tax year 2026 is that the deduction depends on two separate, sequential steps: an employer’s compliance with the new W-2 reporting rule, and a taxpayer’s own calculation of the phase-out on Schedule 1-A. A worker relying on the deduction for the first time under the new rules has no ability to claim more than an employer actually reports, which is precisely the gap the August fact sheet was written to close.
This article was drafted with AI assistance and edited for accuracy.
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