Public Law 119-21 added a federal income tax deduction for qualified overtime compensation for tax years 2025 through 2028. The maximum deduction is $12,500, or $25,000 for a joint return, and it phases down above the income thresholds in the law.
That is a deduction on the worker’s federal return. Overtime pay requirements stay in place. Payroll taxes and withholding stay on the wages.
State rules can still require daily overtime, double time, or other premiums. Federal qualified overtime compensation is narrower: compensation required under section 7 of the Fair Labor Standards Act that exceeds the employee’s regular rate.
Those amounts can overlap. Each one is its own figure.
What the W-2 now has to say.
Beginning with tax year 2026, employers must report qualified overtime compensation on Form W-2, Box 12, using code TT. The IRS instructions for Forms W-2 and W-3 say to report the total qualified amount, even when it exceeds the amount the employee may ultimately deduct.
The IRS qualified overtime questions and answers explain that the reportable amount is generally the premium over the regular rate, such as the half portion of time and a half. The figure is that premium, even when a payroll system labels a larger amount as overtime.
The payroll and middle office process therefore needs to preserve enough detail to distinguish the federal qualified premium from other overtime and premium pay.
Why staffing gets this wrong.
A worker can have multiple placements, rates, locations, or rule sets in the same federal workweek. A state premium can apply to hours outside federal weekly overtime. A blended regular rate can also differ from the straight-time placement rate.
Those differences matter when the organization identifies the amount that will reach Box 12, code TT.
Start with four questions:
- Which rule produced each overtime line?
- What regular rate was used?
- Which lines were required under the FLSA?
- Can the payroll provider receive the qualified amount separately?
What to verify in Najaxa Middle Office.
NMO converts time under configured pay and bill rules and exposes the resulting lines and conversion path for review. The payroll provider remains the system that runs payroll and produces the W-2.
During a working session, we can inspect how your current rules classify overtime and what a configured payroll export would need to carry. We will not call the qualified overtime amount ready until the rule, result, and export have been tested against your requirements.
This article is a product and process discussion, not tax or legal advice. Confirm the reporting treatment with your payroll provider and tax adviser.
If you want to inspect the conversion path on a problem timesheet, bring it to a working session.