If you run payroll for hourly staff — a restaurant, a market, a service station, a warehouse — there’s a new box on the W-2 you file in January, and it covers a year you’re already eight months into. On August 6, 2026 the IRS updated its Q&As on the qualified overtime deduction (FS-2026-13, announced in IR-2026-88). The employer headline: starting with tax year 2026, overtime must be reported separately in Form W-2, box 12, code TT.
What goes in box 12, code TT
The reporting is mandatory, and it is the gate on the employee’s deduction: if the amount isn’t separately reported, they can’t claim it. For most workers it lands on the W-2. In the narrow case of someone who is an employee under the Fair Labor Standards Act but treated as a contractor for tax purposes, it goes on Form 1099-MISC (box 14) or Form 1099-NEC (box 1d) instead.
You report the full qualified overtime you paid, not the amount the employee can actually deduct. The IRS’s own example: an employer who paid $30,000 of qualified overtime in 2026 reports $30,000 in code TT, even though the deduction is capped far below that. Get it wrong and you file a Form W-2c — incorrect information returns carry their own penalties.
California overtime is not all “qualified” overtime
This is the trap for LA employers, and it is why your payroll system’s existing overtime total is almost certainly the wrong number.
Only overtime required by the FLSA counts — and only the premium half. The IRS formula is: FLSA hours worked over 40 in a workweek, times one-half, times the employee’s FLSA regular rate. That regular rate is total pay for the workweek divided by hours actually worked, so commissions, piece rates, and nondiscretionary bonuses fold into it.
Overtime an employer pays “on their own initiative, pursuant to a State law, or under a collective bargaining agreement” is not qualified. The IRS names the patterns: a premium for hours beyond 8 in a workday, beyond 35 in a workweek, for weekend or holiday hours, or double time. California mandates daily overtime past 8 hours and double time past 12 — state law, not the FLSA, so that portion of your overtime line does not belong in code TT.
Worth saying out loud to your staff, too: this is a deduction on their personal return, not a payroll exemption. Overtime is still subject to income tax withholding, Social Security, and federal unemployment tax exactly as before.
What your employees will ask you
The deduction is up to $12,500 of qualified overtime per return ($25,000 joint), reduced once modified adjusted gross income passes $150,000 ($300,000 joint). It’s claimed on Schedule 1-A of Form 1040, itemizing or not. The 2026 Form W-4 was updated so employees can account for it in step 4(b) — expect a few new W-4s once word gets around. As of this writing these answers sit in an IRS fact sheet rather than published guidance, and the IRS says they may be updated on further review.
The obligation is already running — it covers all of 2026, not just the months since the FAQ came out. If your payroll provider isn’t already splitting FLSA-required overtime premium from California daily overtime and double time, the number you need in January doesn’t exist yet, and rebuilding it workweek by workweek in December is miserable. Ask now, while there are four months left to fix it.
Do this before year-end
- Ask your payroll provider one question in writing: “Are you tracking box 12 code TT qualified overtime for 2026?”
- Confirm it separates FLSA weekly overtime from California daily overtime and double time
- Check that your regular rate includes nondiscretionary bonuses, commissions, and piece-rate pay
- Review which staff are genuinely FLSA overtime-eligible — exempt employees generate none of this
- Spot-check a September pay period now instead of finding the gap in January
Related: California payroll in 2026 and tip reporting for restaurants, the other half of the wage-reporting picture for a tipped hourly crew.
This article is general information, not tax advice for your specific situation. Rules change and details matter — talk to a CPA (we know one) before acting on anything here.