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“No Tax on Overtime” Creates a New Employer Reporting Responsibility

Business owner reviewing employer qualified overtime reporting for 2026

Your payroll system says an employee received $15,000 in overtime pay. How much belongs in employer qualified overtime reporting for 2026, is it $15,000, $10,000 or $5,000?

For ordinary time-and-a-half overtime required by the Fair Labor Standards Act, the qualified amount may be only $5,000. The employee’s federal deduction generally applies to the extra one-half-time premium required by the FLSA and not the regular wages paid for those overtime hours.

The deduction belongs to the employee, but the employer must determine and report the qualified amount. That makes payroll setup, employee classification and the reason overtime is paid more important than ever.

Why Employer Qualified Overtime Reporting Matters

For 2026, employers must separately show qualified overtime on Form W-2. You therefore need to identify the qualifying FLSA premium—not simply total every payment processed through an “overtime” code.

Employer Qualified Overtime Reporting Usually Covers the Premium

Assume an employee earns $20 per hour and works 10 hours over 40 during one workweek. At time and a half:

  • $20 per hour is the regular wage.
  • $10 per hour is the extra one-half-time premium.
  • The employee receives $300 for the 10 overtime hours.
  • The employer generally reports $100 as qualified overtime compensation.

The IRS’s general formula for many employees is:

FLSA hours over 40 × one-half × the employee’s FLSA regular rate = qualified overtime compensation

The calculation is generally made workweek by workweek. Hours should not be averaged across multiple workweeks.

The Regular Rate May Not Equal the Base Hourly Rate

Depending on the facts, commissions, nondiscretionary bonuses, shift differentials and other compensation may affect the FLSA regular rate. An employee may also work at multiple rates during a week.

Salaried nonexempt employees and workers paid by piece rate or commission can require different calculations. Do not assume one-half of the stated hourly wage always produces the correct amount.

Employer Qualified Overtime Reporting Depends on Why It Was Paid

The federal deduction generally applies to overtime required under Section 7 of the FLSA. The employee must be covered by the law and not exempt from its overtime requirement.

Not every premium called “overtime” is automatically qualified. Extra pay may come from:

  • State law.
  • A collective bargaining agreement.
  • An employment contract.
  • A policy that begins overtime after 35 hours.
  • A daily overtime rule.
  • Weekend, holiday or shift-premium policies.

Some non-FLSA premiums may interact with the employer’s federal obligation, so do not make blanket assumptions. Each payment needs to be evaluated under FLSA principles to determine what portion was minimally necessary to satisfy the federal requirement.

An earning code named “Overtime” is not enough. Payroll needs to know why the amount was paid and how it was calculated.

Double Time Does Not Double Employer Qualified Overtime Reporting

Suppose the $20-per-hour employee works 10 hours over 40 and receives double time, or $400 total.

In the IRS example:

  • $200 is straight-time compensation.
  • $200 is the total additional premium.
  • Only $100 is necessary to satisfy the usual FLSA time-and-a-half requirement.
  • Qualified overtime compensation is $100—not $200 or $400.

The extra premium can still be a valuable benefit. It simply does not all qualify for this federal deduction.

What Employers Must Report for 2026

On the 2026 Form W-2, the employer reports qualified overtime compensation in Box 12 using code TT. The amount reported with code TT is not necessarily the employee’s final deduction. The employee’s tax return applies personal limits, phaseouts and eligibility rules.

The 2026 Forms 1099-NEC and 1099-MISC also include designated fields where applicable. Confirm that your payroll provider can calculate and report code TT—not merely print the code after you supply a year-end total.

Questions to Ask Your Payroll Provider

  1. How does the system identify employees eligible for FLSA overtime?
  2. How is the regular rate calculated with bonuses, commissions or multiple rates?
  3. Which codes represent federally required overtime?
  4. How are state, contractual, holiday, weekend and double-time premiums separated?
  5. Is the qualified premium calculated workweek by workweek?
  6. Where can we see each employee’s year-to-date qualified amount?
  7. How will code TT appear on the W-2?
  8. How do we correct earlier errors?

If the answer is only, “We have an overtime code,” keep asking questions.

Employer Qualified Overtime Reporting Checklist

  • Review exempt and nonexempt classifications.
  • Confirm which employees are covered by FLSA overtime rules.
  • Inventory every overtime and premium-pay code.
  • Separate federally required overtime from other premiums.
  • Review bonuses, commissions and multiple rates.
  • Test several representative workweeks.
  • Reconcile qualified overtime by employee.
  • Review a sample W-2 for code TT.
  • Correct errors before year-end when possible.

The Employer Takeaway

“No Tax on Overtime” does not mean reporting the employee’s entire overtime check as qualified. The employer generally needs to identify the FLSA-required premium, calculate it using the proper regular rate and separately report it for 2026.

If your business pays overtime, contact My Fiscal Office before year-end. We can help review the payroll categories, reconcile available reports and identify the questions your payroll provider needs to answer.