Preparing for 2026 Qualified Overtime Reporting
Published on by Chaleise Fleming in Tax Services
As covered in our previous articles, the One Big Beautiful Bill Act (OBBBA) introduced valuable new tax deductions, specifically targeting tips and overtime. (See our overview of the IRS update on OBBBA tip and overtime deductions, followed by our IRS guidance on determining your OBBBA deduction.) With that guidance in place, employers must now turn their attention to upcoming reporting requirements. The Form W-2 will be updated in 2026, with Box 12, Code TT added for tracking qualified overtime paid throughout the year. It’s important that employers understand how to track qualified overtime throughout the year for the newly required reporting on the 2026 W-2.
What counts as qualified overtime
For OBBBA purposes, only the “premium” portion of overtime pay is deductible. Under the Fair Labor Standards Act (FLSA), overtime is paid at 1.5 times the regular rate for hours worked, over 40 in a workweek. The OBBBA deduction applies only to the extra 0.5 times the regular rate, or the “half” time in “time-and-a-half.” So, it’s not the full overtime pay. For tipped employees, the regular rate is based on the full minimum wage, and the tip credit does not reduce the deductible overtime premium.
For example, if you have an employee whose regular pay rate is $8, and their overtime rate is $12 ($8 x 1.5), and they work 10 overtime hours, the Qualified Overtime is $40 ((overtime rate of $12 – regular rate of $8 = the half time of $4) x overtime hours worked).
Overtime calculations: bonuses must be included
A critical point for HR and payroll: when calculating overtime, the “regular rate” of pay must include not only hourly wages but also most non-discretionary bonuses (such as those for attendance, production, or longevity). This means that if a non-discretionary bonus is paid, even if it is paid separately from regular payroll, it must be factored into the regular rate for overtime calculations. Discretionary bonuses, which aren’t promised or expected and are given at the employer’s sole discretion, are excluded from the regular rate.
With the above, clear tracking and payroll updates are vital for 2026. Accurate tracking of hours, tips, and all forms of compensation, including bonuses, is essential.
Your payroll systems must be updated to:
- Properly include non-discretionary bonuses in the regular rate for overtime.
- Distinguish between discretionary and non-discretionary bonuses.
- Track overtime hours and calculate the premium portion correctly.
- Maintain clear records for all tip credits and overtime payments.
Failure to maintain accurate records can result in lost deductions, compliance issues, and potential penalties.
Given these changes, employers should be working with their HR and payroll providers to:
- Review and update bonus policies to clearly distinguish between discretionary and non-discretionary bonuses.
- Train payroll staff on the new deduction rules and the importance of including all required compensation in overtime calculations.
- Ensure payroll software is configured to track and report qualified tips and overtime premiums accurately.
- Communicate with employees about how bonuses and overtime are calculated and reported.
What about 2025 qualified overtime reporting?
The W-2 and Forms 1099 won’t be updated for 2025. The IRS has provided transition relief in 2025 for overtime reporting. For 2025, the “separate reporting requirement” for overtime wages is satisfied if qualified overtime is included on Form W-2, Form 1099-NEC, or Form 1099-MISC within regular pay.
Your employees may be asking you for guidance in determining their qualified overtime deduction for 2025. You can voluntarily report your employees’ qualified overtime on the 2025 Form W-2 in Box 14. Alternatively, you can use a separate statement to assist employees (such as pay stubs, payroll summaries, etc.). Employees need to see their overtime hours and rates paid for the full year to determine the qualified overtime amount. A very high-level calculation of 2025 Qualified Overtime is taking 1/3 of the total overtime paid.
Looking ahead
As the IRS continues to finalize guidance and reporting requirements related to OBBBA deductions, employers should begin preparing for the 2026 Form W-2 changes. Establishing accurate tracking processes for hours, tips and qualified overtime will be key to meeting the new reporting obligations.
If you have questions about how the OBBBA may impact your payroll processes or tax strategy, contact us today for a free consultation with one of our top tax pros – as always, we’re here to help.
You may also be interested in our coverage of additional OBBBA topics or in exploring success stories about how we’ve helped our clients.
