Payroll Departments Have a New Box to Fill In, and No More Grace Period
Updated IRS guidance requires employers to report qualified overtime separately on Form W-2 using code TT in box 12, and the penalty relief that covered 2025 does not extend to this year.
The deduction for overtime pay created by last year's tax law has moved from a political slogan to a payroll specification, and employers have about four months to get it right.
Updated IRS guidance issued this month requires employers to report qualified overtime compensation separately on Form W-2, in box 12, using code TT. The amount reported is the total qualified overtime paid — the premium portion required by federal wage law, above the regular rate — which can exceed what an individual employee is ultimately allowed to deduct given the dollar caps.
The relief that expired
For tax year 2025, the agency granted penalty relief to employers that could not separate the figure in time. That relief does not extend to 2026.
The consequence falls on the employee rather than the employer. An amount that is not reported this way cannot be deducted. A preparer cannot substitute the correct number on the return; if the employer reported too little, the employee has to obtain a corrected Form W-2c before claiming the larger deduction.
Employers who discover an error are required to file the corrected form and furnish it to the worker.
Why this is harder than it sounds
Most payroll systems record gross overtime pay as a single figure. The deductible amount is only the premium — the extra half in time-and-a-half — which many systems never stored separately because nothing in the tax code previously required it.
Reconstructing that split retroactively across a year of pay periods, for a workforce with shift differentials, bonuses that affect the regular rate, and multiple state overtime standards, is a substantial project. Employers with multi-state hourly workforces have been told by advisers to test the reporting on a sample of employees well before December.
For workers
Two things are worth doing before the year ends. Check a recent pay stub to see whether overtime premium is being tracked separately. And, if it is not, ask now rather than in February — because the alternative is waiting on a corrected form during filing season at an agency that has lost more than a quarter of its staff.
