Tax Insight

IRS updates FAQs on qualified overtime compensation deduction

Insight
5 minute read
August 20, 2026

What happened?

The IRS released Fact Sheet 2026-13 on August 6, updating its frequently asked questions (FAQs) on the individual income tax deduction for qualified overtime compensation, commonly referred to as “No Tax on Overtime.” The Fact Sheet supersedes the January 2026 FAQs (Fact Sheet 2026-01), removes guidance applicable only to the 2025 tax year, and adds more detailed rules for 2026 through 2028.

Why is it relevant?

The guidance marks a shift from the 2025 transition period to a more formal reporting and compliance regime for 2026 and beyond. Starting in tax year 2026, employers and payors must separately report qualified overtime compensation on Form W-2 (box 12, code TT), Form 1099-MISC (box 14), or Form 1099-NEC (box 1d), as applicable.

Most importantly, for tax years after 2025, an employee generally may not use their own records to determine the deduction if the employer omits or understates qualified overtime compensation on Form W-2; instead, the employee must obtain a corrected Form W-2c. Form 4852 (Substitute for Form W-2, Wage and Tax Statement) or Form 1099-R (Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.) will not satisfy the requirement. This is a significant development for individuals relying on employer or payor information reporting. Employers and payors that report qualified overtime incorrectly on Forms W-2 or 1099 and fail to correct may face information reporting penalties.

Action to consider

Employers and payors should review payroll, Human Resources Information System (HRIS), timekeeping, and year-end reporting processes to confirm they can identify Fair Labor Standards Act (FLSA) required overtime premiums for the 2026 calendar year. Even organizations that established guardrails for the 2025 transition year should note that these reporting requirements will be more stringently enforced going forward. Employers also should evaluate Form W-4 communications, as overtime wages remain subject to federal income tax withholding unless an employee provides an updated, valid Form W-4 reflecting the expected deduction.