The Internal Revenue Service has released updated guidance on the overtime tax deduction that was established through the One Big Beautiful Bill Act in 2025. The clarifications aim to address widespread confusion that arose during the earlier tax filing season when workers were required to determine their own eligibility and calculate deductions independently.
Under the overtime tax break, eligible workers can deduct a portion of qualifying overtime wages up to $12,500 for single filers or $25,000 for married couples filing jointly. The deduction applies specifically to the overtime premium portion of pay covered under the Fair Labor Standards Act, which mandates that nonexempt employees receive at least 1.5 times their regular rate for hours beyond 40 per week. Only the additional half of that rate qualifies for the deduction. For example, if a worker earns $40 per hour regularly and $60 per hour for overtime, only the $20 premium counts toward the deduction. The benefit phases out at income levels of $150,000 for single taxpayers and $300,000 for joint returns.
A significant change for the 2026 tax year is the requirement that employers include the eligible deduction amount on workers’ W-2s using box 12 with a “TT” code. This shifts responsibility from workers to employers, potentially reducing calculation errors. During the 2025 filing season, the Treasury Department and IRS waived this employer reporting requirement because systems were not yet prepared to capture the information and tax forms had not been updated.
In the latest tax season, more than 29 million taxpayers claimed this deduction, with an average amount exceeding $3,100. Approximately 75 percent of those filers reported income below $100,000. Tax professionals advise workers to verify the accuracy of employer-reported amounts on their W-2s using pay stubs, and to request corrected forms if errors are identified. Workers cannot unilaterally adjust deduction amounts but must work with their employers to obtain accurate W-2 documentation.
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