You may have heard about the new federal tax deduction for overtime pay. While it's often described as "no tax on overtime," the actual rules are a little more complicated.

The new deduction may provide income tax savings for eligible employees, but it also creates additional reporting responsibilities for employers.

What Overtime Qualifies?

The deduction generally applies only to the overtime premium required under the federal Fair Labor Standards Act (FLSA).

For example, suppose an employee normally earns $20 per hour and receives $30 per hour for overtime.

Of that $30 overtime payment, the additional $10 premium is generally the portion that may qualify for the deduction.

The entire $30 overtime payment is not deductible.

Certain overtime payments required by state laws, employer policies, or special agreements may not qualify.

How Much Can Employees Deduct?

For eligible employees, the maximum annual deduction is generally:

• $12,500 for individual filers

• $25,000 for married couples filing jointly

The deduction begins to phase out at higher income levels, and additional eligibility requirements apply.

What Does This Mean for Employers?

Beginning with 2026 W-2 forms, employers must separately report qualified overtime compensation using Box 12, Code TT.

This makes accurate payroll records especially important.

Employers should ensure their payroll systems can distinguish qualifying overtime premiums from other types of overtime compensation.

Does This Mean Overtime Is Tax-Free?

No. Overtime wages are still generally subject to applicable payroll taxes and withholding requirements. The new provision creates a potential federal income tax deduction for eligible employees when they file their returns.

The Bottom Line

Accurate overtime calculations and payroll reporting are more important than ever. If your business has employees working overtime, make sure your payroll records properly identify and report qualifying compensation.

Tzinberg & Associates is monitoring these changes and working to ensure payroll reporting is prepared for the new requirements.

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Under U.S. Treasury regulations, any tax advice in this communication is not intended or written to be used to avoid IRS penalties. Tzinberg & Associates provides this information for general guidance only. It does not constitute tax advice, accounting services, investment advice, or professional consulting. Consult a professional adviser before making decisions or taking action, as the information is provided "as is" without any warranties regarding its completeness, accuracy, or timeliness.