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On August 6, 2026, the IRS released Fact Sheet 2026-13, an expanded set of FAQs on the qualified overtime compensation deduction created by the One, Big Beautiful Bill Act. The update replaces January’s FS-2026-01 and marks the shift from 2025’s transition relief to the full compliance framework now in effect.
The deduction allows eligible individuals to deduct up to $12,500 ($25,000 for joint filers) of qualified overtime compensation each year, phasing out once modified adjusted gross income exceeds $150,000 ($300,000 for joint filers). It is available to itemizers and non-itemizers alike, but it is a deduction, not an exclusion. Overtime pay is still fully subject to income tax withholding, Social Security, and unemployment taxes. And only overtime actually required by Section 7 of the FLSA qualifies; overtime paid under a union contract, state law, or company policy alone does not.
Eligibility still turns on FLSA status rather than job title. Executive, administrative, professional, outside sales, and other traditionally exempt employees generally cannot generate qualified overtime, even if their employer pays them overtime voluntarily. The new FAQs add a helpful clarification here: employee-owners with at least a bona fide 20% equity stake who are actively involved in management are typically treated as exempt executives, so overtime paid to them usually will not qualify either.
On calculation, the IRS reaffirms that only the “half” in “time-and-a-half” counts, meaning only the premium required by the FLSA will qualify for the deduction, not the full overtime payment. If an employer voluntarily pays more than the law requires, only the statutorily required premium is deductible. The guidance also walks through trickier scenarios, like healthcare and public-safety workers under alternative FLSA computation methods, and state/local government employees who receive compensatory time off instead of cash, where the deduction attaches only when compensation time is actually paid out.
The most consequential piece of this update is on reporting. Starting in 2026, employers must separately state qualified overtime compensation on Form W-2, Box 12, Code TT (or, rarely, on a 1099). Unlike 2025, there is no more relief for missing entries. An employee simply cannot deduct overtime that is not reported this way. If an employer overstates the amount, the employee is limited to what was actually paid; if an employer understates it, the employee’s only fix is to request a corrected W-2c, and a self-prepared Form 4852 will not substitute. Employers also cannot unilaterally reduce withholding for the anticipated deduction unless the employee submits a new Form W-4 reflecting it.
A few other eligibility rules round out the guidance: employees need a Social Security number valid for employment, married couples must file jointly to claim the deduction, and federal employees are subject to a parallel, OPM-administered framework with its own rules for hours worked and compensatory time.
Given how much now hinges on accurate FLSA classification and precise W-2 reporting, employers should review their payroll practices and correct any errors promptly, while employees who spot a discrepancy on their W-2 should raise it with their employer well before filing season.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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