Report W-2 Overtime Without Misclassifying Exempt or State-Law Premiums

The TT line follows the FLSA file

For tax year 2026, employers and payors must report qualified overtime compensation separately, normally in Form W-2 box 12 code TT. Treat the code as a classification test.

The FLSA is the federal wage-and-hour law that sets the overtime floor. The line follows the FLSA exempt/nonexempt file, not the state-law, union, or policy file.

Exempt employees are not eligible, and nonexempt employees usually get the federal half-time premium only. State-law, union, employment-agreement, and company-policy premiums do not qualify unless they are needed to meet FLSA overtime requirements.

The Treasury Department and IRS issued Fact Sheet 2026-01 FAQs on January 23, 2026, covering the qualified overtime deduction under the One, Big, Beautiful Bill.

The IRS replaced FS-2026-01 with FS-2026-13 on August 6, 2026, adding definitions, calculations, and examples.

The One Big Beautiful Bill Act created IRC Section 225, giving taxpayers a federal deduction for qualifying overtime pay, capped at $12,500, or $25,000 for joint filers, for tax years 2025 through 2028. That employee benefit is why the reporting line exists, but the employer task is to report the qualified amount.

The 1099-MISC box 14 or 1099-NEC box 1d route is reserved for the rare FLSA-employee/federal-contractor case.

Four steps keep the TT number defensible

The order matters. Start with the classification file, then move to the hours, then the premium, then the exclusions. The classification file is the first stop for every TT entry.

• Confirm the employee is FLSA nonexempt before any entry in that code. Use a classification file that names the FLSA exemption, the job duties, and the pay basis. If the file says exempt, stop there. If the file is missing, do not guess from the payroll title, because the reporting line will inherit that error.
• Isolate the hours that FLSA Section 7 actually requires as overtime. The payroll report separates federal overtime hours from state-law overtime, union premiums, and voluntary extra shifts. If a state-law premium is not needed to meet the FLSA overtime requirement, leave it out of the TT amount.
• Calculate the half-time premium over the FLSA regular rate, not the full overtime pay. The worksheet shows the regular rate, the overtime hours, and the extra half-time amount that goes into the TT box. Do not report the whole overtime payment just because the payroll register calls it overtime. The full time-and-a-half amount stays in wages; only the premium above the regular rate is the qualified amount. If the regular rate changes during the year, show the rate used for each period.
• Exclude state-law, union, employment-agreement, and company-policy premiums. Keep those amounts in a separate column, out of the TT total. If a premium is needed to satisfy the FLSA overtime requirement, include only the portion that does that work. A policy that pays extra for a particular shift is not automatically qualified.

The same rule applies when a contract or policy pays more than the federal floor. The extra amount is not qualified unless it is doing the FLSA work. The test is whether the premium is required to meet the federal overtime rule, not whether it sounds like overtime.

The file should answer the employee question

Keep the TT worksheet separate from the ordinary overtime ledger. Review the classification file before the year-end run, especially for employees whose duties changed during the year. Keep state-law and policy premiums visible in the payroll file, even when they are excluded from the reporting line.

The worksheet, file review, and exclusion column are internal controls that keep the TT amount tied to the FLSA file, not to the total overtime column. The year-end reconciliation shows which hours were federal, which rate was used, and which premiums were excluded. The year-end run is the point where the file has to support the number. If the file cannot support the TT amount, fix the file before the W-2 goes out.

Employees may ask what the line means for their tax. The deduction is open to itemizers and non-itemizers, but the benefit starts to phase out when adjusted gross income exceeds $150,000, or $300,000 for joint filers. Married taxpayers must file jointly to claim it.