Qualified overtime in 2026: review the premium, not all overtime pay

“No tax on overtime” is an easy headline to misread. The deduction is not a blanket exclusion of every dollar shown as overtime on a paystub. A sound review starts with eligibility and the qualifying premium.

Check what actually qualifies

The deduction generally covers the premium above the regular rate that is required under section 7 of the Fair Labor Standards Act. For ordinary time-and-a-half, that is the additional half, not the entire payment. Overtime paid only under an employer policy, state rule or agreement does not by itself establish FLSA eligibility.

The maximum is $12,500 per return, or $25,000 for a joint return, with a phaseout beginning above $150,000 MAGI or $300,000 jointly. The deduction applies for 2025–2028. Required Social Security number and married-filing-jointly conditions also matter.

IRS reference: August 2026 qualified overtime FAQs, superseding the January FAQs.

Use the 2026 reporting information

Starting in 2026, qualified overtime must be separately reported, commonly on Form W-2 in Box 12 using code TT. The deduction does not remove employment-tax obligations, and payroll withholding is not automatically reduced.

A simple premium example

Suppose an eligible employee’s regular rate is $20 per hour and a qualifying overtime hour is paid at $30. The extra $10 is the premium to examine—not the full $30. This simplified example does not address regular-rate adjustments, special arrangements or the return-level limits.

Build an exception-review process

1. Identify the payroll source and the tax year.
2. Review the separately reported amount and compare it with available payroll detail.
3. Investigate missing or conflicting information rather than substituting total overtime wages.
4. Apply the taxpayer’s eligibility rules and deduction limits.
5. Document the calculation and any employer clarification.

If the payroll records and reported amount do not align, ask a focused question about the discrepancy. Do not assume that the preparer can simply relabel wages based on the client’s recollection. Keep unresolved material questions visible to the reviewer.

Connect the return to withholding planning

After reviewing eligibility, consider whether a withholding checkup is useful for the client. Keep the projected deduction conservative and revisit it if work patterns or household income change.

General information for tax professionals, reviewed October 9, 2026. Not individualized tax or legal advice. Confirm the applicable tax-year rules and the client’s facts before relying on this information.