A free guide from Deanna R. Ngueket, CPA, LLC
If you run payroll for a business anywhere around Houston, Humble or Atascocita, there is a box on your 2026 W-2s that you have probably not thought about yet. It is box 12, code TT, and it is where you report qualified overtime compensation. Whatever number you put there is the entire “no tax on overtime” deduction your employee is allowed to claim. Not a starting point. The whole thing.
I want to walk you through why that box is easy to get wrong, what happened to the safety net that existed for 2025, and the one request I would make of your payroll provider this week.
The deduction, in plain terms
Under section 225 of the Internal Revenue Code, added by the 2025 tax act, an employee can deduct qualified overtime compensation of up to $12,500 a year, or $25,000 on a joint return, for tax years 2025 through 2028. The deduction phases down once modified adjusted gross income passes $150,000, or $300,000 on a joint return, and it is available whether or not the employee itemizes.
“Qualified overtime compensation” has a narrow meaning. It is only the premium portion of overtime that the Fair Labor Standards Act itself requires, which is the extra half in time and a half for hours over 40 in a workweek. It is not gross overtime pay. It is not every premium the employer chooses to pay.
What changed between 2025 and 2026
For 2025, this was survivable. Notice 2025-62 waived the penalties under sections 6721 and 6722 for W-2s that did not separately state qualified overtime, and Notice 2025-69 gave individuals a set of reasonable methods to reconstruct the figure from their own pay stubs and earnings statements. If payroll left it out, the employee could still work it out and claim it.
That year has closed. Beginning with tax year 2026, employers are required to report qualified overtime compensation separately in box 12, code TT, and IRS Fact Sheet FS-2026-13 (August 2026) is explicit: any amount not reported on Form W-2, box 12, code TT may not be considered for purposes of the deduction. If the number is missing or understated, the employee’s only remedy is to request a Form W-2c from the employer. If the number is overstated, the employee is still only entitled to the amount of qualified overtime compensation actually paid, so they cannot claim the excess either. An error in either direction lands on the employee, and the employer is the only one who can fix it.
Why the number is easy to get wrong
Only what the FLSA requires counts, and the FLSA stops at time and a half. Take an employee with a $28 regular rate. Time and a half pays $42 an hour. The premium is $14, and all $14 qualifies. Double time pays $56 an hour. The premium is now $28, but still only $14 qualifies. FS-2026-13 uses double time as its own example: where an employer pays more overtime than the FLSA requires, only the amount minimally necessary to satisfy 29 U.S.C. section 207 is qualified overtime compensation.
So a Sunday double-time earnings code carried across to box 12 in full overstates that box by half. Daily overtime after eight hours under a state law or a union contract, holiday premiums, weekend premiums: all of that is real money and ordinary taxable wages, and none of it belongs in code TT. And where your drivers fall under the motor carrier exemption at 29 U.S.C. section 213(b)(1), there is no FLSA overtime requirement at all, so there is nothing to report in that box no matter what the pay stub calls it.
Underneath all of it sits the FLSA regular rate, which is not simply the hourly rate. It has to absorb shift differentials, nondiscretionary bonuses and commissions, workweek by workweek. Most payroll systems have never had to surface the FLSA-required premium as its own figure, because until now nobody needed it on a tax form.
Three payrolls, three different problems
The restaurant that only pays time and a half. A Humble restaurant owner has twelve hourly employees, pays straight time and a half for hours over 40, and pays no other premiums. Her payroll system’s “overtime premium” field maps cleanly to code TT. A line cook with a $20 regular rate who worked 300 overtime hours in 2026 has $3,000 in box 12, code TT, and deducts $3,000. This is the easy case, and even here she should confirm that any nondiscretionary bonuses were folded into the regular rate before the premium was calculated.
The machine shop with Sunday double time and a shift differential. A Houston machine shop pays a $2 night-shift differential and double time on Sundays. Payroll has a single earnings code called “OT premium” that includes both the Sunday double-time premium and the night differential, and the provider maps that whole code to TT. A machinist at $28 an hour with 200 Sunday hours shows $5,600 in box 12 when the FLSA-required premium is $2,800. If she claims the $5,600, she has claimed $2,800 she is not entitled to, and FS-2026-13 says she is entitled only to what was actually qualified. The shop needs a W-2c and a payroll fix before January.
The trucking company that pays “overtime” it is not required to pay. An Atascocita carrier’s drivers are covered by the motor carrier exemption under 29 U.S.C. section 213(b)(1). The company voluntarily pays time and a half after 50 hours as a retention tool, and the pay stub labels it overtime. Because the FLSA requires no overtime for those drivers, none of it is qualified overtime compensation. Box 12, code TT should be blank for the drivers, even though the dispatchers and shop staff in the same payroll, who are not exempt, do have a reportable figure. A provider that reports by earnings code rather than by FLSA status will get this wrong for the entire driver roster.
What it costs you to get it wrong
The employer penalties under sections 6721 and 6722 apply to incorrect information returns and payee statements, and they are reduced when you correct the form within 30 days or by August 1. The bigger cost is not the penalty. It is the January conversation with an employee who was told there is no tax on overtime, sees a smaller number than expected in that box, and cannot do anything about it except ask you for a corrected form.
The one request to make this week
Ask your payroll provider for a 2026 year-to-date total of FLSA-required overtime premium only. Not gross overtime pay. Not the full premium on every hour. Not the sum of every earnings code with the word “overtime” in it. If the provider cannot produce that figure, or does not understand the question, that is the answer, and there is still time to fix it before W-2s are due at the end of January.
Every other number on that W-2 your employee can question, reconstruct or correct on their own return. This one they cannot.
If you would like me to review how your payroll is calculating this before year end, call me at (713) 730-9792 or book a free consultation. Payroll setup and clean-up is part of what I do alongside tax planning and bookkeeping and fractional CFO work for business owners.
Primary sources: IRC §225; IRC §6721, §6722; 29 U.S.C. §207 and §213(b)(1); IRS Notice 2025-62; IRS Notice 2025-69; IRS Fact Sheet FS-2026-13 (August 2026); 2026 General Instructions for Forms W-2 and W-3.
General information current as of September 2026, not advice for your situation. Whether any provision described here applies to you, and what it produces if it does, depends on facts this article cannot know. Deanna R. Ngueket, CPA, LLC – certified public accountant licensed in the State of Texas.
