The “No Tax on Overtime” relief, introduced by the One Big Beautiful Bill Act (OBBBA, P.L. 119-21), is already in effect for the 2025 tax year — we wrote about it generally in our guide US Tax Return 2026. Now, in Fact Sheet FS-2026-13 issued on August 6, 2026, the Internal Revenue Service (IRS) has clarified how the settlement will look in subsequent years. The document replaces earlier guidelines from January (FS-2026-01) and introduces a requirement that did not yet exist in 2025: separate reporting of overtime on tax documents.
How much can be deducted and who qualifies
The deduction applies exclusively to “qualified overtime compensation” — meaning that portion of the premium pay resulting directly from the Fair Labor Standards Act (FLSA) requirement, rather than just any overtime in general. In practice, this is the “half” of the “time-and-a-half” (1.5×) rate required by the FLSA for hours worked over 40 in a workweek. The deduction limit is a maximum of $12,500 per year per taxpayer or $25,000 for married filing jointly, with a phase-out when Modified Adjusted Gross Income (MAGI) exceeds $150,000 ($300,000 for married couples). The deduction is available regardless of whether the taxpayer takes the standard deduction or itemizes deductions.
Not every employee qualifies. The relief covers only individuals “eligible for overtime” under the FLSA — and this law excludes, among others, executive, administrative, and professional employees, outside sales representatives, certain computer industry workers, taxi drivers, and some agricultural workers. Additionally, the employee must have a valid Social Security number authorizing work, and married couples must file jointly to take advantage of the relief. The legal obligation to pay the 1.5× rate for overtime is a separate matter from the tax relief — when an employer must pay it was discussed in our article Unpaid Wages, Overtime, and Tips.
New: Mandatory W-2 Entry (Code TT) Starting Tax Year 2026
The biggest change concerns documentation. For the 2025 tax year, employers could, but were not required to, show the overtime amount separately — the employee could calculate it themselves based on their own records. Starting with the 2026 tax year, this option disappears: the employer must enter the full amount of qualified overtime compensation in Box 12 of Form W-2, under code TT (for rare cases where someone is formally an employee under the FLSA but is paid like a contractor — on Form 1099-NEC in Box 1d or Form 1099-MISC in Box 14).
Beware of the trap: the employer enters the entire amount of FLSA-required overtime paid under code TT — even if it exceeds the annual deduction limit of $12,500 / $25,000. It is the taxpayer, when filling out Schedule 1-A, who calculates the final deductible amount after taking into account the limits and the income threshold.
What to do if your employer did not enter the amount or made a mistake
According to the new IRS clarifications, if Box 12 code TT has no amount or the amount is understated, the employee cannot independently add the missing sum based on their own calculations — they must ask the employer for a corrected Form W-2c. If the employer refuses or is unable to issue one, the employee will only be able to deduct what actually appears on the W-2. A substitute in the form of Form 4852 will not fix this situation — the IRS explicitly rules it out as a basis for claiming the overtime deduction.
Overtime is still subject to paycheck tax withholding
The relief does not exempt overtime pay from current income tax withholding — by default, the employer withholds tax just like on any other paycheck. To reduce upfront withholdings, the employee must submit an updated 2026 Form W-4 to their employer, which now has a separate line (Step 4b) for estimating the projected overtime deduction; the updated IRS Tax Withholding Estimator is also helpful.
This material is for informational purposes only and does not constitute tax advice. Rules differ for federal employees, individuals receiving compensatory time instead of paid overtime, and residents of U.S. territories, among others — these cases should be consulted individually with an accountant or tax advisor.
Polish accountants and tax advisors from the Polish Pages directory can help you settle your overtime and check whether your employer correctly filled out Form W-2.
