The IRS recently issued updated guidance regarding the new deduction for qualified overtime compensation, commonly referred to as “No Tax on Overtime.” The updated guidance provides additional clarification regarding eligibility, calculation of qualified overtime, and employer reporting requirements.

One important point is that “No Tax on Overtime” does not mean overtime wages are exempt from tax. Overtime compensation generally remains subject to income tax withholding, Social Security and other applicable employment taxes. Instead, eligible employees may claim an income tax deduction for certain qualified overtime compensation.

For employers, some key items to be aware of include:

• Not all overtime qualifies. Generally, the deduction applies to overtime compensation required under the federal Fair Labor Standards Act (FLSA).

• Only the qualifying overtime premium generally counts. For typical time-and-a-half overtime, this generally means the additional “half-time” premium rather than the employee’s entire compensation for the overtime hours.

• New W-2 reporting begins in 2026. Employers are required to separately report qualified overtime compensation on Form W-2, Box 12, Code TT.

• Payroll withholding generally continues as usual. Employers should not automatically exclude qualified overtime from taxable wages or reduce withholding because of the deduction.

Employers should coordinate with their payroll providers to make sure their payroll systems are prepared to properly identify and report qualified overtime compensation for 2026.

For additional details and examples, please refer to the IRS’s updated guidance, FS-2026-13, “Updates to questions and answers about the new deduction for qualified overtime compensation.” Updates to questions and answers about the new deduction for qualified overtime compensation

This newsletter is intended for general informational purposes only and should not be considered tax, legal, or payroll advice.