Do Employers Have to Report Overtime on the 2026 W-2? What Houston Business Owners Should Do Before Year-End

Yes. Starting with tax year 2026, employers must report each employee's qualified overtime on Form W-2 in box 12, code TT, and the IRS has said the penalty relief it gave for 2025 does not apply this year (IRS Fact Sheet FS-2026-13). The amount is only the premium portion of overtime required by federal law, generally the half in time-and-a-half, and it is due on W-2s by February 1, 2027 (IRS General Instructions for Forms W-2 and W-3).

The stakes go beyond penalties. Your employees can deduct only the qualified overtime you put on their W-2. If payroll gets the number wrong, your employees lose part of a deduction that can be worth up to $12,500 each until you fix it.

Many business owners I work with in Houston run hourly crews, so this is a payroll question I'd settle before the last December pay run, not in late January.

This is general education, not advice for your specific situation.

What is the no tax on overtime deduction?

The 2025 tax law created a federal income tax deduction for qualified overtime from 2025 through 2028. Eligible employees can deduct up to $12,500 a year, or $25,000 on a joint return, whether or not they itemize (the statute). The deduction shrinks by $100 for every $1,000 of modified adjusted gross income above $150,000, or $300,000 for joint filers. Married employees must file jointly to claim it, and they need a Social Security number valid for employment.

By my arithmetic, a single employee with $180,000 of modified AGI is $30,000 over the threshold, so the $12,500 cap drops by $3,000 to $9,500. A married couple at $340,000 is $40,000 over, so their $25,000 cap drops to $21,000. That's why your W-2 number matters even for well-paid supervisors and skilled trades: the full amount you report is the starting point, and the employee's return applies the limits.

Two points matter for employers. First, it's only an income tax deduction: overtime is still subject to income tax withholding, Social Security and Medicare tax (FS-2026-13). Second, the law ties the deduction to the employer's information return. No W-2 entry, no deduction.

What counts as qualified overtime on the W-2?

Qualified overtime is overtime pay required by the Fair Labor Standards Act that is more than the employee's regular rate. For most employees, the IRS formula is applied workweek by workweek (FS-2026-13):

Hours over 40 in the workweek x one-half x the employee's regular rate = qualified overtime for that week

Three details trip people up:

• Only the required premium counts. If you pay double time, daily overtime or weekend premiums that federal law doesn't require, only the amount federal law requires is qualified. The IRS example: a $20-an-hour employee working 50 hours and paid double time gets $200 of premium, but only $100 is qualified overtime.
• The regular rate includes more than the hourly wage. It is all pay for the workweek, minus certain statutory exclusions, divided by the hours actually worked. Bonuses promised in advance, such as production or attendance bonuses, generally count; only truly discretionary bonuses are excluded (U.S. Department of Labor, Fact Sheet #56A).
• Report the full amount, not the deductible amount. If you paid an employee $30,000 of qualified overtime, box 12 shows $30,000 even though the deduction is capped at $12,500. The employee's return applies the limits.

Here is how a production bonus changes the number for one week. This is my own illustration using the IRS method.

If your payroll system calculates overtime only on the base wage, the number in box 12 will be understated and so will your employees' deductions.

Who doesn't get qualified overtime?

Employees who are exempt from overtime under the Fair Labor Standards Act have no qualified overtime, even if you pay them overtime under a company policy or contract (FS-2026-13). Common exemptions include executive, administrative and professional employees, outside sales staff and certain computer professionals (U.S. Department of Labor, Fact Sheet #17A).

That includes most owners. The IRS says an employee who owns at least a bona fide 20% equity interest and is actively engaged in management is generally an exempt executive, whatever the type of entity. If you pay yourself a salary from an S corporation, the overtime deduction isn't part of that decision; my S corporation salary guide covers the factors that are.

What if the W-2 amount is wrong?

The rules here are stricter than most W-2 items (FS-2026-13):

• If you find an error in box 12, code TT, you must file and furnish a corrected Form W-2c.
• An employee whose W-2 understates overtime must get a W-2c to deduct the missing amount. A substitute W-2 on Form 4852 doesn't count.
• An employee can't deduct more than was actually paid, even if the W-2 overstates it.

The IRS penalty for an incorrect or late W-2 is $60 per form if corrected within 30 days of the due date, $130 if corrected by August 1, and $340 after that. A separate penalty of the same amounts applies to incorrect employee copies (IRS General Instructions for Forms W-2 and W-3). For a business with 40 hourly employees, a systemic error is a real cost before you count the time spent on corrections and the employee frustration.

Do tipped employees have new W-2 boxes too?

Yes. For 2026, cash tips reported to the employer go in box 12 with code TP, and box 14b shows the Treasury Tipped Occupation Code for the work (IRS General Instructions for Forms W-2 and W-3). Restaurants, salons and other tipped businesses have both new reporting items to handle this year.

What should employers do before December 31?

• Ask your payroll provider directly whether it is tracking qualified overtime separately and will populate box 12, code TT on 2026 W-2s, and how it handles bonuses in the regular rate.
• Confirm classifications. Make sure each employee's exempt or nonexempt status matches the Department of Labor rules, not just job titles.
• Separate required overtime from extra premiums. Daily overtime, weekend pay and double time above the federal requirement shouldn't be in code TT.
• Run a year-to-date reconciliation on a few employees with heavy overtime and bonuses now, while there is still time to fix the calculation before the final December payroll.
• Tell employees what to expect. Employers can't reduce withholding for the deduction on their own, but employees can submit a new Form W-4 that accounts for it (FS-2026-13).
• Calendar February 1, 2027 for furnishing and filing W-2s.

While you're reviewing payroll, look at the other year-end decisions for the business too: my guide to buying equipment before year-end and my year-end tax planning checklist cover the big ones.

How I can help

Mercer Street doesn't run payroll or prepare tax returns. What I do is help owners understand how payroll, compensation and tax decisions fit together, and coordinate with your payroll provider and CPA so the right questions get asked before the forms go out. If you're deciding how to pay your team or yourself in 2027, that's a good use of a working session.

Mercer Street's work is billed at $600 per hour with a 2-hour minimum ($1,200). See how working together works, and schedule a consultation when you're ready.