IRS Updates ‘No Tax on Overtime’ Rules for 2026: What Workers Need to Know

The IRS has clarified how workers can claim the federal tax deduction for qualifying overtime pay, including new reporting requirements for employers.

The IRS updated its frequently asked questions on the "no tax on overtime" deduction earlier this August after confusion during the 2025 filing season. Employers will be required to include the eligible amount on workers’ 2026 W-2s, meaning taxpayers will no longer have to determine the qualifying amount themselves.

IRS Clarifies What Counts As Overtime

The overtime tax break was included in President Donald Trump’s One Big Beautiful Bill Act, signed into law in July 2025. The temporary deduction applies for tax years 2025 through 2028 and allows eligible workers to deduct up to $12,500 for single filers or $25,000 for married couples filing jointly.

The deduction applies only to the overtime premium, or the additional half of the standard time-and-a-half rate. For example, a worker earning $40 an hour who receives $60 an hour in overtime can count only the $20 premium toward the deduction. The benefit begins phasing out at $150,000 for single taxpayers and $300,000 for married couples filing jointly.

That distinction was also highlighted by economist Justin Wolfers, who argued that the legislation did not eliminate taxes on overtime altogether. Wolfers said the benefit applies only to the additional half of time-and-a-half pay, subject to limits and eligibility requirements.

Employers Will Report Eligible Amounts

The updated IRS FAQs require employers to report the amount eligible for the deduction in Box 12 of workers’ 2026 W-2s using a "TT" code.

The IRS also clarified that if state law or a union agreement requires overtime pay that differs from the Fair Labor Standards Act, only the portion mandated under the federal law qualifies for the deduction.

The change addresses a problem that surfaced during the first filing season. For tax year 2025, the IRS and Treasury Department waived the employer reporting requirement because payroll systems and tax forms were not ready. Many taxpayers therefore had to use pay stubs or final payroll statements to estimate their eligible overtime.

Tom O’Saben, director of tax content and government relations for the National Association of Tax Professionals, told CNBC that tax professionals had to use workers’ pay stubs and make a "best guesstimate" of the amount of qualified overtime.

Andrew Lautz, senior director of federal policy at the Tax Foundation, said employer reporting should make the process easier for workers.

"It was complicated this filing season, and I expect employer reporting will make things less complicated for workers," Lautz said.

Overtime Deduction Tied To Bigger Refund Expectations

More than 29 million taxpayers claimed the overtime deduction for the 2025 tax year through the April 15 filing deadline. The average deduction exceeded $3,100, while 75% of those filers had income below $100,000 and 96% had income below $200,000.

The deduction has also featured prominently in the administration’s expectations for refunds. Treasury Secretary Scott Bessent previously projected that households could see refunds increase by $1,000 to $2,000, pointing to provisions including deductions for tips and overtime.

President Trump later predicted the "largest tax refund season ever," pointing to the legislation’s tax changes, including the overtime provision. He described the One Big Beautiful Bill Act as combining 17 initiatives into a broader tax package.

The scope of the overtime benefit, however, remains narrower than the phrase "no tax on overtime" might suggest. Wolfers previously said that workers receiving time-and-a-half pay receive the benefit only on the additional half, and only within the applicable limits.

Workers Should Check Their 2026 W-2

Even with employer reporting in place, tax professionals recommend that workers review the overtime amount on their W-2 against their payroll records.

O’Saben said he plans to have clients bring their pay stubs so the reported amount can be checked for accuracy.

If the amount is incorrect, workers cannot simply change the deduction themselves. Lautz said taxpayers who believe their employer reported too much or too little eligible overtime must request an updated W-2.

The reporting change means the 2026 filing process should no longer require workers to reconstruct their qualifying overtime from payroll records, but checking the W-2 against those records could still be important.

Disclaimer: This content was produced with the help of AI tools and was reviewed and published by Benzinga editors.

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