A New Box on the W-2 — and a New Reason Employees Will Check It

The federal “no tax on overtime” deduction lets eligible employees deduct part of their overtime pay from their income for tax years 2025 through 2028. For 2025, employers got a break: separate reporting wasn’t required, and employees could estimate the amount themselves.

That break is over. Starting with tax year 2026, employers must report qualified overtime on Form W-2 in Box 12 using code TT. The IRS updated its guidance on August 6, 2026, and it makes one point especially clear: for 2026, an employee can only deduct the qualified overtime that appears on a properly furnished W-2. If the number is wrong or missing, the employee has to come back to you for a corrected Form W-2c — they can’t work around it with a substitute form.

In other words, the overtime figure on your W-2s is about to become one of the most-checked numbers in your payroll. And that number starts with your timecards.

What Counts as “Qualified Overtime”

This is where most of the confusion lives. Qualified overtime is not the full overtime check. It’s only the premium the federal Fair Labor Standards Act (FLSA) requires — the amount above the employee’s regular rate.

For a standard time-and-a-half week, that means the “half”:

  • An employee with a $20 regular rate works 50 hours in a workweek.
  • The FLSA requires overtime for the 10 hours over 40, at $30 an hour.
  • Of that $30, $20 is regular pay and $10 is the qualified premium.
  • Qualified overtime for the week: 10 hours × $10 = $100, not $300.

A few rules matter a lot in practice:

  • Only FLSA-required overtime counts. Employees who are exempt from FLSA overtime have no qualified overtime, even if you pay them overtime by policy or under a union contract.
  • Extra overtime you pay beyond the FLSA doesn’t count. Daily overtime under a state law, double time, overtime after 35 hours, or weekend and holiday premiums are fine to pay — but only the portion needed to satisfy the FLSA goes in code TT. The IRS expects employers to work that out using the FLSA’s own rules.
  • The “regular rate” isn’t always the base rate. Under the FLSA, it generally includes things like shift differentials and non-discretionary bonuses. Get the regular rate wrong and the premium is wrong too.

Code TT isn’t “overtime pay.” It’s the FLSA-required premium, calculated workweek by workweek. That distinction is exactly what your time & attendance system has to get right.

What Doesn’t Change

  • Payroll taxes still apply. Overtime remains subject to federal income tax withholding and to Social Security and Medicare tax, for both the employer and the employee.
  • Withholding doesn’t change on its own. You may only reduce withholding for the deduction if the employee gives you an updated Form W-4 that accounts for it.
  • The deduction has limits. It’s capped at $12,500 per return ($25,000 for joint filers) and phases out at higher incomes — but that’s the employee’s calculation, not yours. You report the full qualified amount paid.

Why This Is Really a Time & Attendance Problem

Payroll can only report what the timecards support. To produce an accurate code TT figure, you need to know — for every workweek of the year:

  1. Which employees are FLSA overtime-eligible. Exempt and non-exempt status should be set correctly on every employee record, not assumed from job titles.
  2. Exactly how many FLSA overtime hours each employee worked, based on your defined workweek.
  3. Which overtime is FLSA overtime and which isn’t. If you pay daily overtime, double time, or holiday premiums, those need to be separated from the FLSA-required premium rather than lumped into one “OT” bucket.
  4. The regular rate for that week, including differentials and bonuses that feed into it.

If your pay rules lump every kind of premium into a single overtime code, year-end becomes a manual reconstruction project. If they already separate FLSA overtime from everything else, code TT is close to a report you can run.

A Year-End Checklist You Can Start Now

There’s still time to get 2026 right. W-2s for tax year 2026 are due to employees and the Social Security Administration by February 1, 2027.

  • Audit exempt vs. non-exempt flags on every active and terminated employee for the year.
  • Review your pay designations and overtime rules. Make sure FLSA overtime is tracked separately from state daily overtime, double time, and other premiums.
  • Confirm your workweek definition matches what payroll uses.
  • Run a year-to-date overtime report now, not in January. Spot-check a few employees by hand, including anyone with shift differentials or bonuses.
  • Talk to your payroll provider about how they’ll populate code TT from your hours and whether they need a separate overtime premium field from your time & attendance export.
  • Clean up missed punches and open edits before close. Every unresolved timecard is a potential W-2c later.

Where AI and Analytics Help

This is a good use for the tools you may already have. An AI workforce assistant connected to your time & attendance data can answer “Who worked FLSA overtime this quarter?” or “Which employees have overtime but are flagged exempt?” in seconds, and workforce analytics dashboards make overtime trends by week and department easy to review before year-end. (We shared seven more questions worth asking every pay period in 7 Questions to Ask Your AI Workforce Assistant Before Every Payroll Close.)

How CTR/NY Can Help

Attendance on Demand tracks overtime by workweek using pay designations you control, so FLSA overtime can be kept separate from daily overtime, double time, and holiday premiums, and exported cleanly to payroll. If you’re not sure your current rules will hold up for code TT, the CTR/NY team can review your overtime setup with you before the year closes.

This article is general information, not tax or legal advice. Confirm your specific situation with your payroll provider or tax advisor. Sources: IRS Questions and answers about the new deduction for qualified overtime compensation (updated by Fact Sheet FS-2026-13, August 6, 2026), What to know about the No Tax on Overtime deduction, and the 2026 General Instructions for Forms W-2 and W-3.