The Short Version
For tax year 2026 and later, employers and other payers must separately report qualified overtime compensation. On the W-2 it goes in Box 12 under code TT. Forms 1099-NEC and 1099-MISC were updated to carry it as well. The 2025 transition relief that made this optional has expired.
What Changed
For tax year 2025 the IRS granted relief: because the OBBBA was signed in July 2025 with retroactive effect, employers were not required to break out qualified overtime on information returns for that year. Many did not, and their employees were left to self-calculate under Notice 2025-69.
That relief was explicitly a one-year bridge. From 2026 the reporting is mandatory, and the burden of producing an accurate premium figure sits with payroll.
What Has to Be Isolated
The reportable amount is the premium portion of FLSA-required overtime — the excess over the employee's regular rate, not the total overtime payment. For standard time-and-a-half that is one third of overtime earnings, but you cannot rely on that shortcut as a system rule, because it breaks in exactly the cases where errors are most expensive.
Where the simple ratio fails:
- Non-discretionary bonuses. Production, attendance, and safety bonuses must be folded into the regular rate, which raises the premium above one third of nominal overtime pay.
- Multiple pay rates. An employee working two roles at different rates has a weighted-average regular rate for the week.
- Double time and contractual premiums. Only the FLSA-required half qualifies. Pay above that must be excluded from the code TT figure even though it is overtime in the everyday sense.
- State-only overtime. California daily overtime and seventh-day premiums do not qualify unless the hours also breach 40 for the week. Systems that flag "overtime" generically will over-report. See which overtime actually qualifies.
- Retroactive pay. A mid-period raise that triggers retro pay recalculates the regular rate for the affected weeks, and with it the premium.
A generic "sum the overtime earnings code and divide by three" configuration will produce wrong numbers for any employer with bonuses, multiple rates, or California operations.
Configuration Checklist
- Confirm your payroll platform has a dedicated qualified-overtime accumulator distinct from your gross overtime earnings code.
- Confirm it computes from the FLSA regular rate, including non-discretionary bonuses, rather than base rate.
- Confirm state-only premiums are excluded unless the week exceeds 40 hours.
- Confirm double-time and contractual premiums contribute only their FLSA-required portion.
- Run a parallel calculation on a sample of employees — ideally the messiest ones, with bonuses and multiple rates — and reconcile against the accumulator before year end, not in January.
- Verify the figure maps to Box 12 code TT on your W-2 output, and to the correct box on 1099-NEC and 1099-MISC for any non-employee payees.
The FLSA regular-rate calculator is useful for the parallel check, since regular-rate error is the most common source of a wrong premium.
The Employee Communication Problem
Expect questions, and expect them to be based on a misunderstanding. Two in particular:
- "Why is my paycheck the same?" Because the OBBBA created a deduction claimed at filing, not a withholding exemption. Federal income tax continues to be withheld on overtime all year. Employees recover it on their return via Schedule 1-A. Employees who want the benefit earlier can adjust Step 4(b) of their W-4.
- "Why is my code TT so small?" Because it is the premium half only, and it is already included in Box 1. It is not a separate payment and it is not the amount of tax saved.
Getting ahead of both questions with a short note before W-2s go out costs less than fielding them one at a time. Running representative numbers through the no tax on overtime calculator gives you concrete figures to use, so the messaging reflects what employees will actually see.