Overtime Premiums & Year-End Reporting
Employers must report qualifying overtime compensation beginning in 2026 as part of the “No Tax on Overtime” portion of the One Big Beautiful Bill Act). The qualified premiums are based on FLSA overtime guidelines.
| What must be reported | W-2 Field | 1099 Field | |
|---|---|---|---|
|
|
Total Amount of Qualifying Overtime Compensation designated by the code TT Employers must report the total amount of qualifying overtime compensation |
Box 12 |
Box 1d for 1099-NEC Box 14 for 1099-MISC |
What You Need to Do
It is your responsibility as an employer to determine how overtime is calculated and ensure compliance with the Fair Labor Standards Act. You must follow the steps below to ensure the accuracy of what is being reported on W-2s. The deadline to request adjustments to the calculation is December 11, 2026.
If Box 12, Code TT appears on your employees’ 2026 W-2s, this indicates that qualifying overtime compensation is being reported under the OBBBA No Tax on Overtime provision.
To review impacted employees, go to REPORTING > YEAR END REPORTS ON DEMAND > search EMPLOYER . to find W-2 Copy D Employer.
Impacted employees will have Box 12a, code TT.
Please note that this amount is also found on your PAYROLL REGISTER with each payroll processed. During the year, some clients had asked us to hide the code on the report – if you have OT and do NOT see it on your PAYROLL REGISTER, you can email [email protected] to unhide the code. It has ZERO impact to the actual payroll being processed – it is strictly a W2 reporting item.
Employers are responsible for ensuring their overtime policies and calculations comply with the Fair Labor Standards Act (FLSA). If you are uncertain, please consult your accountant, employment attorney, or HR consultant.
PremierNow’s system is configured based on isolved’s standard calculation and guidance from its legal advisors. If you believe the calculated qualifying overtime amount needs to be adjusted, please notify PremierNow no later than December 11, 2026 so any necessary adjustments can be processed before year-end.
Upon request, we can provide a report showing employees’ year-to-date overtime earnings. You would then be responsible for reviewing those earnings, calculating any necessary adjustments, and providing PremierNow with the corrected amounts to override the system-generated figures.
Consider the employee impact before requesting changes. The No Tax on Overtime provision is a federal income tax deduction, and the actual benefit varies based on each employee’s income, filing status, and eligibility. We encourage employers to consider the potential tax benefit relative to the administrative effort involved, while ensuring all required reporting remains accurate.
Note: Changes requested after year-end processing is complete and W-2s have been generated may require Forms W-2c and will result in additional correction fees.
What PremierNow & isolved are doing to help:
- We have configured our payroll system based on guidance provided by isolved and its legal advisors to support the new OBBBA reporting requirements.
- PremierNow will rely on the overtime earnings and configurations provided or approved by the employer.
What we don’t do:
- PremierNow does not establish or validate your company’s overtime policies.
- We will not independently audit or verify that the underlying calculations for comply with federal or state wage and hour laws.
If you are uncertain whether your current overtime practices are FLSA-compliant or how your overtime earnings should be classified for purposes of this deduction, we recommend consulting your accountant, employment attorney, or qualified HR consultant.
Background on Overtime Premium under OBBBA
The Overtime Premium deduction typically covers the difference between regular and overtime pay.
Example: An employee earns $25 per hour and works five overtime hours per week.
- Regular hourly rate: $25
- Overtime hourly rate: $37.50
- Qualifying overtime premium: $12.50 per overtime hour
- Annual qualifying overtime premium (52 weeks): $3,250
If the employee falls within the 22% federal income tax bracket, that could result in approximately $715 in annual federal income tax savings.
Overtime Tax Free
This does not mean all overtime pay is tax-free. Only the overtime premium portion (the extra 0.5× paid on overtime hours) MAY be exempt from federal income tax (still taxable for FICA). The straight-time portion of overtime pay would still be taxed like regular wages. Overtime required under state law, required by a collective bargaining agreement, or paid voluntarily by an employer does not qualify.
Exempt vs Non-Exempt
Non-Exempt Employees are eligible for overtime pay. These employees are typically hourly but can also be salaried. They must be paid 1.5× for hours worked over 40 in a workweek. Overtime eligibility is based on job duties + pay, not just how they are paid. Examples include administrative support, technicians, non-supervisory staff, customer service, and many other hourly roles.
Exempt Employees are NOT eligible for overtime pay. To be exempt, an employee generally must meet all three:
- Salary basis – paid a fixed salary
- Salary level – paid at least the federal minimum threshold
- Duties test – primary duties are executive, administrative, or professional
Common examples include managers, professionals such as CPAs, attorneys and engineers, HR, finance, and operations leaders with decision-making power. Title alone does not make someone exempt.
Biggest misconception (important)
If someone is a salaried employee, that does not necessarily mean they are exempt. An employee can be salaried and non-exempt (still owed overtime), or hourly and exempt (rare, but possible in limited cases).
Here are some requirements to keep in mind for the overtime deduction:
- You can’t file your taxes using the filing status Married Filing Separately.
- The deduction applies to non-exempt employees who receive “required overtime” pay under federal overtime law.
- The deduction starts to phase out if your income is over $150,000 ($300,000 for Married Filing Jointly).
- Those with income over $275,000 ($550,000 for Married Filing Jointly) won’t qualify for the deduction.
The Breakdown Details
When someone earns overtime, they’re paid 1.5×, which is actually two parts:
- Straight-time pay (1.0×)
→ treated like normal wages
→ still fully taxable - Overtime premium (0.5×)
→ this is the “extra” part
→ this is the part OBBBA targets
Only that premium portion is what would be “tax-free.”
Example
Employee makes $20/hour, works 10 hours of overtime
Normal OT pay
- OT rate = $30/hour (1.5 x $20)
- 10 hours × $30 = $300
Split it out
- Straight time: 10 × $20 = $200(still taxable)
- OT premium: 10 × $10 = $100(this is the part potentially income-tax free)
So only $100 would be exempt from federal income tax — not the full $300.
FAQs
Only the additional overtime premium required under federal law qualifies—not the entire overtime payment. See above for calculation of Overtime Premium.
Here’s an example:
An employee earns $25 per hour and works five overtime hours per week.
- Regular hourly rate: $25
- Overtime hourly rate: $37.50
- Qualifying overtime premium: $12.50 per overtime hour
- Annual qualifying overtime premium (52 weeks): $3,250
If the employee falls within the 22% federal income tax bracket, that could result in approximately $715 in annual federal income tax savings.
The deduction begins to phase out when annual modified adjusted gross income exceeds $150,000 for single filers or $300,000 for married couples filing jointly.
The maximum annual deduction is $12,500 for individual filers and $25,000 for joint filers.
Not automatically. Overtime continues to be subject to regular payroll tax withholding, including Social Security and Medicare. Eligible employees generally claim the federal income tax deduction when filing their personal income tax returns.
Employees who regularly work qualifying overtime may see meaningful federal income tax savings, even if they earn only a few thousand dollars in overtime premiums throughout the year.
Actual tax savings depend on individual income, filing status, eligibility, and other tax circumstances.
Important Reminder: PremierNow will rely on the overtime earnings, calculations, and configurations provided or approved by the employer. We do not independently audit or verify overtime calculations for FLSA compliance. Responsibility for determining qualifying overtime and ensuring the accuracy of employer-provided information remains with the employer.
Deadline to request adjustments: December 11, 2026.
Changes requested after year-end processing is complete and W-2s have been generated may require Forms W-2c and will result in additional correction fees.