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IRS Sets Mandatory Overtime Reporting Standards for Employers

IRS Sets Mandatory Overtime Reporting Standards for Employers

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    The IRS has updated its guidance on reporting information for the qualified overtime deduction by establishing a permanent framework for employer compliance. The new IRS Fact Sheet removes earlier guidance applicable only to the 2025 tax year and adds more detailed rules for 2026 through 2028, focusing on the specific reporting details required of employers and on related Fair Labor Standard Act (FLSA) rules.

    Qualified Overtime Deduction Basics

    The deduction for overtime compensation, enacted in H.R. 1, the One Big Beautiful Bill Act (OBBBA), applies as follows:

    • $12,500 per return per year or $25,000 for MFJ
    • Started in 2025
    • For itemizers and non-itemizers
    • Begins phasing out for MAGI above $150,000 for single taxpayers or $300,000 for MFJ
    • Complete phaseout at MAGI over $275,000 for singles and over $550,000 for MFJ
    • Married taxpayers must file jointly to get the deduction

    The deduction is taken by individuals on one supplemental page of the existing Schedule 1, Form 1040 or Form 1040SR—Schedule 1-A, Additional Deductions.

    The IRS also has released a draft 2027 Form W-4 with new lines for employees to reduce their income tax withholding to account for the overtime deduction. Only the employee, not the employer, can reduce withholding for the deduction, the IRS reminds employers.   

    Employer Reporting Requirements Beginning in 2026

    Starting in tax year 2026, employers and payors of overtime must separately report qualified overtime compensation on Form W-2, Form 1099-MISC, and Form 1099-NEC (note that this specific information was not required on the 2025 forms).   

    Example: Employer paid Employee qualified overtime compensation of $30,000 in 2026. Employer must include $30,000 on Employee’s Form W-2 using box 12, code TT even though the overall limit on the deduction for qualified overtime compensation is $12,500 ($25,000 in the case of a joint return).

    FLSA Rules and Qualified Overtime Compensation

    The IRS explains that individuals who are ineligible for overtime under the FLSA do not receive qualified overtime compensation regardless of other laws or circumstances (such as a collective bargaining agreement) that provide for overtime pay. Thus, employers report only FSLA-eligible employee compensation. Also, because exemptions are specifically defined under the FLSA, an employer should carefully check the exact terms and conditions for each exemption before applying them.

    Employee Owners Are Not Eligible for the Deduction

    Employee-owners who have at least a 20% equity interest in the enterprise they work for, regardless of the business type, and who are actively engaged in management, are considered executives and are FLSA overtime-ineligible employees. They do not qualify for the overtime deduction, and their compensation is not reported by employers.

    Calculating Qualified Overtime Compensation

    Qualified overtime compensation is determined each workweek. For most employees, qualified overtime compensation paid to an FLSA overtime-eligible employee for the workweek is determined as follows:

    Qualified overtime compensation for the workweek =

    (FLSA hours worked over 40 in the workweek) × ½  x (employee’s FLSA regular rate of pay)

    Note that the IRS removed the 2025 transition-year penalty relief that had excused employers and other payors from separately reporting qualified overtime compensation. The new framework is now in effect, and separate reporting is required for 2026 and beyond in compliance with the new guidelines.

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