No Tax on Overtime: What W-2 Code TT Means in 2026

1 — A deduction, not a tax exemption

The rule creates a federal income-tax deduction for “qualified overtime compensation.” It does not make overtime tax-free. In its FAQ (FS-2026-13, Q1) the IRS says the deduction “does not mean that overtime compensation is excluded or exempt from gross income.” Overtime is generally still wages for employment taxes, including federal income tax withholding, Social Security tax and federal unemployment tax. The deduction is available whether a person itemizes or takes the standard deduction.

2 — Who it covers

Only overtime required by section 7 of the Fair Labor Standards Act (FLSA) counts (26 U.S.C. §225(c)(1); FS-2026-13, Q1 and Q4). A person has to be covered by the FLSA and not exempt from its overtime rules. Common exemptions the IRS lists include, but are not limited to: executive, administrative and professional employees; outside sales employees; certain computer-related occupations; certain commissioned employees of retail or service establishments; certain transportation workers, such as railroad and air carrier employees, taxi drivers and certain motor carrier employees; employees of certain seasonal amusement or recreational businesses; and certain agricultural employees (Q4). Overtime paid only because of a union contract, state law or employer policy does not count (Q4, Q16). An employee who owns at least a real, or bona fide, 20% stake in the business and actively manages it is generally exempt, so not eligible (Q5). The statute also requires a Social Security number on the return (§225(d); Q24) and, for married people, a joint return (§225(e); Q25). Different rules may apply to federal employees and U.S. territories (FS-2026-13, Topic G and Q31); this article does not cover them.

3 — Only the “half” counts

By statute, qualified overtime is overtime pay “in excess of the regular rate” (§225(c)(1)). The IRS describes this as generally the “half” portion of time-and-a-half (Tax Tip 2026-06; Instructions for Forms W-2 and W-3, code TT). For most employees, the IRS workweek formula is FLSA overtime hours (hours over 40 in a workweek) times one half times the FLSA regular rate (Q12). A workweek is a fixed 168-hour period, and generally weeks cannot be averaged (Q13). The regular rate includes most pay for the week, not just the hourly base (Q15; 29 U.S.C. §207(e)). The IRS gives this double-time example (Q16): a worker puts in 50 hours at a $20 regular rate and is paid double time for the 10 overtime hours. The employer paid $400 for those hours, but the FLSA required only $300. Qualified overtime is $100, which is the $10-an-hour premium for 10 hours.

4 — Limits, the income phase-out and the end date

The deduction is capped at $12,500, or $25,000 on a joint return (§225(b)(1); FS-2026-13, Q2). It is reduced by $100 for each $1,000 of modified adjusted gross income (the income figure on the tax return, with a few additions) above $150,000, or $300,000 on a joint return (§225(b)(2)(A)). It applies to tax years beginning after December 31, 2024, and the statute ends it: “No deduction shall be allowed under this section for any taxable year beginning after December 31, 2028” (§225(g)). The W-2 and W-3 instructions say the same in different words, “tax years beginning after 2024 and ending before 2029,” and the IRS FAQ explains how to report the code TT amount for “tax years 2026-2028” (Q19), the years when employers must show it on the W-2. The amount is figured on Schedule 1-A (Form 1040), Part III (Q19).

5 — What W-2 box 12, code TT shows

Starting with tax year 2026, employers must report qualified overtime in box 12 of Form W-2 using code TT (FS-2026-13, Q6 and Q10; Instructions for Forms W-2 and W-3). In rare cases a payer reports it instead on Form 1099-NEC, box 1d, or Form 1099-MISC, box 14 (Q6, Q7). Code TT shows the total qualified overtime paid, not the amount a person can deduct. The IRS example (Q10) reports $30,000 in code TT even though the cap is $12,500. For 2025, employers did not have to show qualified overtime separately, and Notice 2025-69 let workers figure the deduction without it, so many 2025 W-2s show no amount. The IRS says “no relief is available for tax years after 2025” (Q20).

6 — What employers must do, and what happens when a W-2 is wrong

As the IRS describes it, employers compute the overtime premium for each workweek (Q12) and report it in code TT (Q10). If code TT is wrong, the employer files Form W-2c with the Social Security Administration and gives the employee a copy “as soon as possible” (Q11). Incorrect forms may be subject to information-reporting penalties under section 6721 or 6722 (Q11). On the employee side, the rules for tax years after 2025 are these: only amounts reported in code TT can be used (Q20; §225(a)); an understated amount needs a Form W-2c to count (Q22); a substitute W-2 on Form 4852 does not count (Q23); and an overstated code TT does not raise the deduction above what was actually paid (Q21).

7 — Withholding still applies

The IRS says overtime “is subject to federal income tax withholding” (FS-2026-13, Q8). An employer may not reduce withholding for the deduction unless the employee furnishes an updated, valid Form W-4 (Q8). The 2026 Form W-4 has a step 4(b) worksheet for the expected deduction, and the IRS Tax Withholding Estimator was updated (Q9). Social Security and Medicare taxes still generally apply to overtime pay (Instructions for Forms W-2 and W-3, code TT note).

8 — Seven common misunderstandings, side by side

“Overtime is tax-free”: it is a capped income-tax deduction, and payroll taxes and withholding generally continue (Q1, Q8). “All my overtime pay counts”: only the FLSA-required premium does (§225(c)(1); Q12). “Double time doubles the deduction”: only the minimum FLSA premium counts (Q16). “State or union overtime counts”: only FLSA-required overtime counts (Q4, Q16). “My employer can just lower my withholding”: only with an updated Form W-4 (Q8). “If it is not on my W-2, I can add it myself”: for tax years after 2025, not without a Form W-2c, and not with Form 4852 (Q20, Q22, Q23). “It is permanent”: the statute ends it for tax years beginning after December 31, 2028 (§225(g)).

The big picture

“No tax on overtime” is a temporary, capped federal income-tax deduction for the FLSA-required overtime premium, usually the “half” of time-and-a-half. It does not stop withholding or payroll taxes. Starting with 2026, the amount a person can deduct depends on what the employer reports in W-2 box 12, code TT, so accurate employer reporting matters more than before. The deduction is figured on Schedule 1-A and, under the statute, ends after tax year 2028.

In your own words: a crew member worked 50 hours at a $20 regular rate and was paid double time for the extra 10 hours. How much of that week counts as qualified overtime, why did their paycheck withholding not change, and where would the amount show up on their 2026 W-2?

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