No tax on overtime, and your paycheck looks exactly the same.

The IRS announced the update in IR-2026-88 and published it as Fact Sheet 2026-13, superseding the FAQs it issued on January 23. Most of the revision is cleanup. Two pieces are not. Starting in tax year 2026, employers and payors are required to report qualified overtime separately: Form W-2 box 12 using code TT, or, for the rare worker who is an employee under labor law but treated as a contractor for tax purposes, Form 1099-MISC box 14 or Form 1099-NEC box 1d. For 2025 that separate reporting was not required at all.

The other addition is an entire new topic on federal income tax withholding, which exists because enough people asked the same question after their first overtime check of the year. The answer is that nothing about your paycheck changes on its own.

Question 8 of the new FAQs is blunt. Must employers reduce wages subject to income tax withholding to account for the deduction? No. Overtime pay, qualified or not, stays subject to federal income tax withholding, Social Security, and federal unemployment tax. Your employer is not permitted to shrink your withholding on its own. The deduction is not an exclusion from income. It comes off on your return, on Schedule 1-A, months after you earned the money.

You can pull it forward if you want to. The 2026 Form W-4 was rebuilt for this: you estimate your expected qualified overtime deduction and enter it in step 4(b), using the deduction worksheet attached to the form. The IRS updated its Tax Withholding Estimator to handle it too. Whether you should is a real question, not a formality. Filing the W-4 spreads the money across your remaining paychecks this year. Doing nothing sends you the same money as a larger refund in early 2027. Overestimate your hours, cut your withholding too far, and you write a check in April. Steady overtime, file the W-4. Unpredictable overtime, let the refund sort it out.

This is the part worth acting on this week. Under section 225(a), you may only deduct qualified overtime that your employer included on a properly furnished W-2. For 2025 the IRS granted relief from that requirement in Notice 2025-69, so people could work out their own numbers from pay records. The updated FAQs say it plainly: no relief is available for tax years after 2025. If box 12 code TT comes back blank or short, that overtime is not deductible, no matter how many hours you can prove you worked.

Errors run both directions and both are yours to catch. If your employer overstates the figure, you may still only count what you were actually paid. If it omits or understates the figure, you have to request a corrected W-2, a Form W-2c, from your employer. Neither is a conversation you want to open in April. Pull up a pay stub now and see whether your payroll system tracks qualified overtime as its own line. If nobody at your company can tell you, that is your answer.

Only overtime required by section 7 of the Fair Labor Standards Act counts, and only the premium half of it. The IRS formula is hours over 40 in a workweek, times one half, times your regular rate. Say you earn $30 an hour and work 5 overtime hours a week for 50 weeks. You were paid $11,250 for those 250 hours. The deduction only sees the half portion, $3,750, which in the 22% bracket is worth about $825 off your tax bill. Real money. Not a windfall.

The cap is generous for nearly everyone: $12,500 per return, $25,000 on a joint return. Hitting it at that same $30 rate would take roughly 833 overtime hours in a year, about 17 every single week. The limits that actually bite sit elsewhere. The deduction shrinks once modified adjusted gross income clears $150,000, or $300,000 filing jointly. You need a valid Social Security number, and if you are married you have to file jointly. You do not have to itemize. And if you are exempt from FLSA overtime, which covers most salaried executive, administrative, and professional roles plus outside sales and many computer occupations, none of this reaches you even if your employer pays overtime by contract or union agreement. The deduction runs through 2028.