The OBBA has introduced a qualified overtime deduction available for tax years 2025 through 2028. This deduction applies to qualified overtime pay received during the year and is limited to:
- $12,500 for single filers
- $25,000 for married filing jointly
The deduction begins to phase out when Modified Adjusted Gross Income (MAGI) exceeds $150,000 for single filers and $300,000 for married filing jointly.
2025 Reporting
Although the overtime deduction was effective for the 2025 tax year, W‑2 forms were not updated to reflect this change. Taxpayers will need to rely on employer-provided documents—such as a final pay stub—to report qualified overtime when filing their 2025 return.
2026 and Beyond
Beginning with 2026 W‑2s issued in January 2027, employers will report the annual total of qualified overtime in Box 12 using code TT. This amount will be used by taxpayers when filing their 2026 individual income tax return.
What Counts as Qualified Overtime?
Qualified overtime reflects the half‑time premium paid when an employee works more than 40 hours in a workweek, based on the Department of Labor (DOL) standard definition of overtime.
Employers may choose to offer additional overtime incentives—such as double-time or shift premiums—but these additional amounts do not increase the base half‑time premium used to calculate the deduction.
Examples
Example 1:
John earns $20 per hour and works 43 hours a week.
- Overtime rate: $30/hour (time and a half)
- Premium portion for 3 overtime hours: $90
- Qualified overtime deduction: $30 ($90 ÷ 3)
Example 2:
John earns $20 per hour and receives double time for Sunday work. He works 49 hours total, with 5 Sunday hours.
- Standard overtime: 4 hours at $30/hour → $120 premium → Qualified amount = $40 ($120 ÷ 3)
- Sunday double time: 5 hours at $40/hour → $200 premium → Qualified amount = $50 ($200 ÷ 4)
- Total qualified overtime: $90
QuickBooks Tracking
QuickBooks has introduced a payroll tracking item that accumulates qualified overtime throughout the year. The year‑to‑date total will automatically populate in Box 12 with code TT on 2026 W‑2s.
Employers may:
- Track qualified overtime during normal payroll processing by selecting the item under Other Deductions and entering the calculated amount, or
- Add the tracking item after payroll is run by reopening and editing the pay stub.
This tracking item does not impact employee pay or payroll tax calculations.
If you have any questions about overtime deduction rules and QuickBooks tracking, please reach out to one of our trusted advisors at Vrakas CPAs + Advisors.
