Photo by Hennie Stander on Unsplash
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The tax deduction for some overtime pay took effect more than a year ago. But workers, and their bosses, still have some questions about one of the more-heralded tax breaks in the Republicans’ vast 2025 tax reform bill. The Internal Revenue Service answers in its just-updated OT Fact Sheet.
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Although the year was more than half over when the One Big Beautiful Bill Act (OBBBA) was signed into law on July 4, 2025, several individual tax breaks immediately became effectively for that tax year.
That led to some scrambling by the Internal Revenue Service and taxpayers to determine just how those special temporary provisions — notably, no tax on some tip income, changes on how some overtime (OT) earnings are taxed, a tax deduction for interest paid on certain new vehicle loans, and a bonus tax break for senior citizens — would be implemented.
All of these tax breaks are available to eligible filers regardless of whether they itemize or takes the standard deduction.
The good news is that, aside from the disappointment of some taxpayers upon discovering the new OBBBA tax relief was not as generous as was implied by those in Washington, D.C., who crafted the laws, claims for and IRS processing of the new tax benefits generally went smoothing during this year’s filing season.
But, as we filers and Uncle Sam’s tax collector know all too well, taxes are always evolving. And we all can learn from prior years’ tax experiences about how to make things easier.
That’s the goal of the IRS’ recently released revisions to frequently asked questions (FAQs) about the OBBBA deduction for qualified overtime compensation.
New and expanded questions and answers: The 13-page Fact Sheet (FS-2026-13) updates and additions were made on Aug. 6. They supersede the IRS FAQs issued in the agency’s first Fact Sheet of the year on Jan. 23.
This month’s changes include —
- Deletion of information that was applicable solely to the 2025 tax year.
- Updates throughout, including adding an index, renumbering certain FAQs, and making clarifying revisions to most questions.
- Clarification on the limits and timing of the qualified overtime compensation deduction.
- Additional information on coverage and exemptions under the Fair Labor Standards Act (FLSA).
- More details on Form W-2, Form 1099-MISC, and Form 1099-NEC requirements applicable to employers and payors of qualified overtime compensation.
- Added information on federal income tax withholding procedures related to qualified overtime compensation.
- More information on the requirement that qualified overtime compensation must be separately reported on Form W-2 to claim the deduction.
- Added detailed information on issues applicable to federal employees.
Below is a bit more from some of the Fact Sheet’s questions and answers (Q&As) that are likely to be the most reviewed by qualifying workers.
OT compensation specifics: The Republican authors of the new tax break typically refer to it as the No Tax on Overtime. However, it does not apply to all OT.
The updated IRS Fact Sheet addresses that issue in its first question under “The Basics” section. It notes that overtime compensation not required by the FLSA is not eligible for the deduction.
“Under the FLSA, employees must receive at least the minimum wage and, in general, may not be employed for more than 40 hours in a workweek without receiving at least one and one-half times their regular rates of pay for the overtime hours. The regular rate and the amount employees should receive cannot be determined without knowing the number of hours worked in a particular workweek,” notes the IRS FAQ update.
The IRS refers OT workers to the U.S. Department of Labor’s separate Fact Sheet #22 for more information about what time qualifies as “hours worked” per the FLSA.
OT and paycheck withholding: Questions and answer #1 also points out while qualifying OT can be claimed for tax purposes, the new law does not change the basic treatment of overtime as far as other taxes.
“The deduction for qualified overtime compensation does not mean that overtime compensation is excluded or exempt from gross income. Generally, overtime compensation is not excludible or exempted from wages for purposes of employment taxes including income tax withholding, Social Security, and federal unemployment taxes,” according to the Fact Sheet.
And since overtime pay is subject to tax and employer federal withholding, the Fact Sheet also notes that employers generally may not reduce withholding on wages to account for workers’ expected OT deduction claim.
The smaller withholding can only be made when employees furnish their companies with an updated (and valid) Form W-4 that takes the expected tax break into account. Here, as in all cases where a worker adjusts paycheck withholding, employees who receive overtime pay can use the IRS’ online Tax Withholding Estimator, which the Fact Sheet says has been updated to account for the OT deduction.
OT deduction’s earnings limits: As for that deduction itself, another Q&A under The Basics reminds workers of the OT tax deduction’s limits. It applies to a maximum of $12,500 of qualified overtime compensation earned for the year per individual tax return. The OT amount is $25,000 for married taxpayers who file a joint tax return.
The deduction also is reduced if a taxpayer’s modified adjusted gross income (MAGI) exceeds certain amounts for the tax year exceeds. The earnings levels that trigger the smaller claim are $150,000 for single taxpayers and $300,000 for joint filers.
OT reporting requirements: Starting with this 2026 tax year, the Fact Sheet notes that payors and employers must separately report qualified overtime compensation on IRS Forms 1099-MISC (box 14); 1099-NEC (box 1d); or, more commonly, the salaried worker’s W-2 (box 12, code TT).
Be sure to check these forms (and other statements you need to file your taxes) as soon as you get them early next year. If you find your employer has made an error, contact them immediately to clear it up so you can make the April 15 filing deadline.
As for mistakes on Form W-2, the IRS says the errant employer must file Form W-2c, Corrected Wage and Tax Statements (Corrected Wage and Tax Statement) with the Social Security Administration and furnish Form W-2c to the employee as soon as possible. An employer that files or furnishes an incorrect Form W-2 may be subject to information reporting penalties under section 6721 or 6722, including reduced penalties for timely corrections.
Note, too, that the Form W-2 code TT is the total qualified overtime compensation a worker is paid. But that amount, due to other limitations, cannot be the amount ultimately deductible by the employee.
The Fact Sheet offers the following example: Employer paid Employee qualified overtime compensation of $30,000 in 2026. Employer must include $30,000 on Employee’s Form W-2 using box 12, code TT even though the overall limit on the deduction for qualified overtime compensation is $12,500 ($25,000 in the case of a joint return).
The OT recipient taxpayer will use that full amount and, following the instructions for Form 1040 Schedule 1-A (via your tax software or paid preparer) compute the deductible amount of qualified overtime compensation.
2026 OT must be on W-2: The Fact Sheet also notes a reporting change for this 2026 tax year. The worker’s overtime amount must be reported on the worker’s Form W-2.
Last year, in implementing the OT tax deduction after it become official on 2025’s Independence Day, the IRS provided relief from the requirement that the OT earnings used to claim the deduction be reported on the workers W-2 forms.
But now, the updated OT Fact Sheet note that last tax year’s special reporting considering is no longer in effect.
The IRS reiterates that, “under section 225(a) of the Internal Revenue Code, an employee can only deduct qualified overtime compensation that the employee’s employer included on a properly furnished Form W-2.”
Read, review, get added help: Again, this IRS OT Fact Sheet is for general guidance. And if you spend time reading the 13 pages, you might find some of it confusing.
So, let me repeat a mention from a big earlier in this post. When it comes to claiming the OT tax deduction, or any other tax break, don’t wing it. If you are unsure, talk with a tax preparer.
This could be a tax professional that you pay. You have a variety of tax pro options that could fit your needs.
Or, if you cannot afford to pay a tax pro, you might qualify for no-cost help during filing season from IRS-trained staff at Volunteer Income Tax Assistance (VITA) services nationwide.
Yes, getting the added help requires a bit of tax-filing OT. But it’s generally worth it so you can accurately claim this (and other) tax breaks (new and old).
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