Qualified overtime pay remains subject to federal income tax withholding, and payroll may not reduce withholding because an employee expects to claim the deduction.
An employee who wants withholding adjusted must furnish an updated, valid Form W-4 that accounts for the expected deduction. The 2026 Form W-4 has a place for it in step 4(b).
Beginning with tax year 2026, employers must report qualified overtime compensation separately on Form W-2, in box 12 using code TT. Qualified overtime compensation is the portion of overtime pay required under Section 7 of the FLSA that exceeds the employee’s regular rate – generally, the half-time premium rather than the employee’s entire time-and-a-half payment.
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Report the full amount of qualified overtime compensation, even when the employee can’t deduct all of it. The IRS example: an employer that paid $30,000 in qualified overtime reports $30,000, though the deduction is capped at $12,500, or $25,000 for taxpayers filing a joint return.
An employer that finds an error in box 12, code TT must file Form W-2c with the Social Security Administration and furnish a copy to the employee as soon as possible.
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