Qualified Overtime Deduction — $12,500 Cap, W-2 Code TT
How the temporary deduction for FLSA overtime premium works. The $12,500 cap, MAGI phaseout, W-2 box 12 code TT, and why only the “half” of time-and-a-half counts.
By Greg, Editor at Finance Maxx. Published · Updated
Overtime is still taxable. What changed is a temporary income-tax deduction for a slice of it.
This guide is the paycheck version: what counts as qualified overtime compensation, how the $12,500 cap works, what W-2 box 12 code TT means starting in 2026, and how to turn that number into a rough tax savings. Figures come from IRS Fact Sheet FS-2026-13 (updated August 6, 2026) and Schedule 1-A guidance. Confirm the current IRS FAQs before you file.
What changed
The 2025 tax law added a deduction for qualified overtime compensation required under the Fair Labor Standards Act. You claim it on Schedule 1-A (Form 1040), Part III. You do not have to itemize.
It is not “no tax on overtime.” The wages still count as income for withholding, Social Security, and Medicare. The deduction only reduces taxable income for federal income tax, up to the cap, and only for the FLSA premium amount.
National Payroll Week (September 7–11, 2026) is a good moment to check whether payroll is tracking that premium correctly before year-end W-2s.
What actually counts
Qualified overtime compensation is the overtime premium required under section 7 of the FLSA (29 U.S.C. § 207). For most hourly employees, that is the “half” in time-and-a-half for hours over 40 in a workweek.
It is not:
- The straight-time pay for those overtime hours
- Extra overtime your employer pays above the FLSA minimum (for example, double time beyond time-and-a-half)
- Overtime paid only because of a state law, union contract, or company policy when the FLSA did not require it
- Pay to someone who is FLSA overtime-ineligible (common exemptions include many executive, administrative, and professional employees)
Worked FLSA example
Assumptions from the IRS fact sheet: $20 regular rate, 50 hours in the workweek, employer pays double time on the 10 overtime hours.
- Straight time on 10 overtime hours: $200
- Extra premium at double time: another $200
- Amount the FLSA required as premium: $10 × 10 hours = $100
- Qualified overtime compensation for the deduction: $100
Only that $100 enters the tax-deduction math for the week.
Caps, phaseouts, and Schedule 1-A
| Limit | Amount |
|---|---|
| Annual deduction cap | $12,500 per return ($25,000 married filing jointly) |
| MAGI phaseout begins | $150,000 ($300,000 joint) |
| Where you claim it | Schedule 1-A, Part III |
| Tax years discussed in IRS FAQs | 2025 (with transitional W-2 relief) and 2026–2028 reporting rules |
The employer may report more in box 12 code TT than you can deduct. Example from the IRS: $30,000 of qualified overtime on the W-2 still faces the $12,500 / $25,000 deduction ceiling.
Married filers must file jointly. The worker who received the overtime needs a Social Security number valid for employment.
What your W-2 will show
Starting in tax year 2026, employers must separately report qualified overtime compensation on Form W-2 box 12 using code TT. That code is the number you start from on Schedule 1-A.
For tax year 2025, Notice 2025-69 gave transitional relief, so some 2025 W-2s may not show a separate overtime line even when overtime was earned. For tax years after 2025, you generally cannot count more than what appears in box 12, code TT.
If the amount is missing or too low, ask for a Form W-2c. A substitute Form 4852 does not increase the deductible amount.
Overtime is still withheld for income tax. An employer cannot reduce withholding just because this deduction exists. The 2026 Form W-4 was updated so you can account for the expected deduction when you set withholding.
A number you can run
This site does not have a dedicated overtime-premium calculator. Use the existing tools this way:
- From a few recent pay stubs, estimate weekly FLSA overtime hours and your regular rate.
- Weekly qualified amount ≈ 0.5 × regular rate × FLSA overtime hours (only when the FLSA required time-and-a-half).
- Multiply by weeks, then cap at $12,500 ($25,000 joint) before any MAGI phaseout.
- Open the federal tax calculator with and without that deduction as a planning shortcut. The tax difference is not a refund of the overtime. It is the effect of a lower taxable income at your bracket.
- During Payroll Week, also run the paycheck calculator so withholding still matches the real take-home, not the headline.
Example, stated assumptions: $25 regular rate, 5 FLSA overtime hours a week for 40 weeks, single, no phaseout, 22% marginal rate.
- Weekly qualified premium: 0.5 × $25 × 5 = $62.50
- Annual qualified amount: about $2,500
- Rough federal tax effect at 22%: about $550
Your rate, hours, exemptions, and MAGI will differ. Use box 12 code TT when the W-2 arrives.
Related deductions on the same form
Schedule 1-A also holds the tip deduction, the car loan interest deduction, and the senior deduction. Each has its own caps and phaseouts. Do not mix them.
What this does not do
- It does not erase FICA on overtime.
- It does not cover FLSA-exempt workers who get “overtime” only by contract.
- It does not let you invent a larger number than the W-2 (after 2025) or the actual FLSA premium paid.
- It is educational, not filing software and not advice.
FAQ
Is the overtime deduction the full overtime pay on my stub?
No. Qualified overtime compensation is generally only the FLSA overtime premium — the “half” above the regular rate in time-and-a-half — not the straight-time dollars on those overtime hours.
Do I need box 12 code TT on my W-2?
For tax years after 2025, you can only count what your employer reported on Form W-2 box 12, code TT. If the amount is wrong or missing, request a Form W-2c. Form 4852 cannot increase it.
Is this a tax credit that refunds my overtime?
No. It is a deduction that lowers taxable income, claimed on Schedule 1-A Part III. Overtime wages are still subject to federal income tax withholding, Social Security, and Medicare.
What are the dollar caps and income phaseouts?
The deduction is up to $12,500 per return ($25,000 if married filing jointly). It is reduced when MAGI exceeds $150,000 ($300,000 for joint filers). Confirm the phaseout math in the Schedule 1-A instructions.
Can I claim it if I take the standard deduction?
Yes, if you otherwise qualify. Married filers must file jointly, and the person who received the overtime needs a Social Security number valid for employment.
For the official rules, start with FS-2026-13 and the IRS page on Schedule 1-A.