Working Overtime? The IRS Just Clarified a Tax Break That Could Impact Your Wallet
Every day, millions of Americans work overtime to pocket extra cash. Now, those same Americans will have an easier time claiming a new federal tax deduction when filing their 2026 returns, per CNBC.
The IRS has updated its previously-released guidelines on the tax break, including a requirement that employers report qualifying overtime directly on workers’ W-2 forms. This major change comes on the heels of the first tax-filing season for this new deduction, which left workers and tax professionals alike sorting through pay records to determine how much overtime actually qualified.
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The updated IRS guidelines, released in August, now more explicitly makes clear which overtime counts for the break.
The Overtime Deduction Is Narrower Than the Name Suggests
To be clear, this tax break applies to the overtime premium that’s required by the Fair Labor Standards Act (FLSA). For workers covered by the law, that generally means the extra half of their regular hourly rate for hours worked beyond 40 in a workweek.
Let’s break it down further with an example: For any employee making $20 an hour, the usual time-and-a-half arrangement is such that overtime would pay them $30 per hour. That $10 premium is the amount eligible for the deduction.
Also of note, there is a ceiling to this benefit. Single taxpayers can deduct up to $12,500 in qualified overtime compensation, while married couples filing jointly can go up to $25,000. The deduction then phases out entirely once modified adjusted gross income eclipses $150,000 for single-fingers or $300,000 for the joint filers.
Your Employer Now Has More To Report
Previously, employers didn’t have to separately report qualified overtime for 2025, and employees were often saddled with the extra work of sorting through their pay stubs to figure out their eligible amount.
Now, that all has changed.
Beginning with the 2026 tax year, employers must now report qualifying overtime on year-end tax forms (which will appear in Box 12 of Form W-2 with Code TT, per the IRS), saving the employee extra time and work come tax time.
Check the Number When Your W-2 Arrives
Don’t toss out your pay stubs just yet, though.
As another example, if the qualified overtime amount on a W-2 is incorrect, the IRS requires the employee to go back to the employer for a corrected form. Employees can’t substitute a different number on the tax return, which makes a quick comparison with payroll records beneficial once W-2s arrive. Otherwise, an error could follow the taxpayer into the filing process.
The Bottom Line
For overtime workers, this news breaks down rather simply: The 2026 W-2 should tell you how much of your overtime qualifies under the federal rules — meaning you won’t have to reconstruct the figure from months of pay stubs, as many taxpaying overtimers did last year.
Still, it pays (and saves) to be on the safe side. When your W-2 arrives, it’s worth taking the time to compare the qualified overtime figure against your own records. Having mismatched numbers will force you into a time-consuming refilling process, and you’ll be forced to work overtime on your own taxes.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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