The Overtime Deduction
A new above-the-line deduction allows eligible workers to deduct the overtime premium portion of pay—when the amount is properly reported by the employer/payor. Here’s a concise overview for 2025 and what to expect for 2026 reporting.
At a Glance
- Years: 2025–2028
- Annual cap: up to $12,500 single / $25,000 joint
- Phase-out: starts at $150,000 MAGI (single) / $300,000 (joint)
- What counts: the FLSA-required premium above the regular rate (the “half” portion)
- Joint return: required if married
How the deduction works
The deduction applies to qualified overtime compensation—overtime pay above the regular rate that’s required by the Fair Labor Standards Act. The key is documentation: the total qualified overtime must be designated and furnished by the employer/payor on the W-2/1099 or a statement. Estimates from paystubs aren’t allowed.
Reporting: 2025 vs. 2026
W-2 isn’t redesigned yet. Employers should provide the total qualified overtime—for example in Box 14 or an attached statement—so employees can claim the deduction.
2026 forms
Draft W-2 adds Box 12 code “TT” for qualified overtime. Watch for final IRS instructions before year-end 2026.
Who’s generally eligible—and who isn’t
Non-exempt workers who receive FLSA-required overtime (and have the amount reported to them) may qualify. Common non-eligible groups are roles exempt from FLSA overtime (executive, administrative, professional, outside sales, and certain computer employees paid ≥ $27.63/hour), plus various transportation and industry-specific exemptions.
Employer checklist (now → Jan)
- Enable payroll tracking for qualified overtime
- Decide how you’ll furnish totals for 2025 (Box 14 or statement)
- Confirm 2026 W-2 Box 12 “TT” support with payroll vendor
- Set an internal deadline to compile year-end totals
Employee tips (at tax time)
- Use the reported qualified overtime total from your W-2/statement
- Remember annual caps and phase-outs
- Married? You must file jointly to claim
- Save the statement with your records
Summary for general information only; monitor forthcoming IRS instructions for final reporting details.
