New Overtime Reporting Requirement on 2026 Form W-2s

We want to alert those whose Company issues W-2s to their employees to a significant change in payroll reporting that will affect all employers beginning with the 2026 tax year (though some consideration is also needed for the current tax year, 2025).

Under the One Big Beautiful Bill Act (OBBBA), new federal requirements mandate that employers report qualified overtime compensation separately on Forms W-2, starting with wages paid in 2026 (Forms W-2 due February 1, 2027).

What’s Changing?

  • Separate Overtime Reporting: For 2026 and later, employers must report the total amount of qualified overtime compensation paid to each employee on Form W-2. This is in addition to the regular wage reporting.
  • Definition of Qualified Overtime: Only the “premium” portion of overtime pay required under section 7 of the Fair Labor Standards Act (FLSA) - generally, the “half” portion of “time-and-a-half” pay for hours worked over 40 in a workweek - should be reported as qualified overtime. Overtime pay in excess of FLSA requirements (such as double time, or state-mandated premiums) is not included in this amount.
  • New W-2 Boxes: The draft 2026 Form W-2 introduces a new code (TT) in Box 12 for reporting the total amount of qualified overtime compensation. Box 14b will be used for the Treasury tipped occupation code, if applicable.

Why Is This Important?

  • Employee Deductions: Employees may be eligible for a new federal income tax deduction for qualified overtime compensation, up to $12,500 ($25,000 for joint filers), subject to income phaseouts. Accurate reporting on the W-2 is essential for employees to claim this deduction.
  • Compliance: The IRS will require this information for all Forms W-2 issued for 2026 and later. For 2025, the IRS has provided transition relief and will not penalize employers for not reporting overtime separately, but this relief does not extend to 2026.

What Should Employers Do for 2025?

While not required, employers are encouraged to provide employees with a separate accounting of qualified overtime compensation, either in Box 14 of Form W-2 or via a separate written statement or secure online portal. This can help employees determine their eligible deduction for 2025.

Employers should ensure that their payroll and timekeeping systems accurately track overtime hours and pay, especially the “overtime premium” required under the Fair Labor Standards Act (FLSA), as only this portion is eligible for the deduction.

Employees may request information from employers to help substantiate their deduction, so employers should be prepared to provide pay stubs, year-end summaries, or other documentation if asked.

What Should Employers Do for 2026?

Although this change is not going into effect until the next tax year, we wanted to bring to your attention some tips that can help you prepare now.

  • Update Payroll Systems: Begin working with your payroll provider or internal payroll team to ensure your systems can track and separately report the FLSA overtime premium for each employee.
  • Review Overtime Policies: Ensure your overtime pay practices are in line with FLSA requirements, and that you can distinguish between FLSA-required overtime and other premium pay.
  • Prepare for New W-2 Format: Familiarize yourself with the draft 2026 Form W-2 and the new reporting codes. The IRS may issue further guidance or make changes before the 2026 forms are finalized.
  • Recordkeeping: Maintain detailed payroll records to substantiate the amounts reported as qualified overtime compensation.

The new deduction is for federal income tax purposes only. It does not affect payroll tax withholding or the calculation of FICA or FUTA taxes.

If you use a payroll processing company, we encourage you to review the above issues with them to confirm they are addressing the requirements.

If you have questions about how these changes affect your business or need assistance updating your payroll processes, please contact our office. We will continue to monitor IRS guidance and provide updates as more information becomes available.