Pay Overtime? Your 2026 W-2s Need a New Number, and Last Year's Grace Period Doesn't Carry Over

Last year’s Forms W-2 had no place to put overtime. This year’s do. If you pay hourly workers time-and-a-half, the 2026 W-2 you’ll hand them in January has a new box 12 code, TT, for the extra overtime pay that workers can now deduct, and the penalty relief that let employers skip it for 2025 doesn’t cover 2026 ^{[2, 3]}.

The reminder comes at a fitting moment. On Sept. 4, the IRS asked employers to “revisit important payroll responsibilities” ahead of National Payroll Week, which runs Sept. 7 to 11 ^[1]. Happy Labor Day. Here’s what’s in that checkup this year.

What’s different on the 2026 W-2

The changes trace back to P.L. 119-21, enacted July 4, 2025 ^{[2, 4]}. Section 70202 of that law created a federal income tax deduction for qualified overtime compensation of up to $12,500, or $25,000 on a joint return, for tax years 2025 through 2028 ^{[3, 4]}. It shrinks by $100 for every $1,000 of modified adjusted gross income above $150,000 ($300,000 joint) ^[4]. The worker claims the deduction. Your job, as the employer, is reporting the number it’s based on: the law requires the W-2 to show “the total amount of qualified overtime compensation” ^[4].

According to the IRS’s draft 2026 instructions for Forms W-2 and W-3, posted in January ^[2]:

• Box 12, code TT reports total qualified overtime. The instructions put it plainly: “only the ‘half’ portion of ‘time-and-a-half’ compensation would be reported using code TT” ^[2].
• Box 12, code TP reports the total cash tips employees reported to you ^[2].
• Box 14b, carved out of the old box 14, holds up to two Treasury Tipped Occupation Codes for workers with tips; if any tips came from a nonqualifying occupation, “000” goes in as one of the codes ^[2]. What used to go in box 14 moves to box 14a ^[2].
• Box 12, code TA reports employer contributions to a Trump account, a new kind of IRA for children under 18. Starting July 4, 2026, employers may contribute up to $2,500 a year for an employee or an employee’s dependent under a section 128 contribution program, and that amount is excluded from the employee’s income ^[2].

None of this changes the tax on the paycheck itself. Overtime is still generally subject to federal income tax withholding and to both the employer and employee shares of Social Security and Medicare tax, the instructions say ^[2].

One more change hits the smallest employers. For wages paid after 2025, the W-2 reporting threshold rose from $600 to $2,000 when no federal income, Social Security or Medicare tax was withheld ^[2]. If you pay someone a little cash for occasional work and withhold nothing, that’s the number to know.

Why 2025 was easier, and why 2026 won’t be

The deduction took effect for 2025, but the 2025 forms weren’t redesigned for it ^[3]. So in Notice 2025-62, published in the Internal Revenue Bulletin last November, the IRS treated 2025 as a transition period. It said it would not impose the penalties for incorrect W-2s and 1099s on employers who left out a separate overtime figure or tip details, as long as the rest of the form was complete and correct ^[3]. The notice is blunt about scope: “This relief applies only for taxable year 2025” ^[3].

Even for 2025, the notice encouraged employers to give workers the overtime figure some other way, through box 14, an online portal or a separate statement, so they could claim the deduction ^[3]. For 2026, there’s a dedicated box and no announced relief.

My view, as analysis: this is where complexity lands on the smallest payrolls. A business with a payroll service will mostly need to confirm the service is ready. A business that runs payroll on a spreadsheet now has to split every overtime paycheck into regular pay and premium pay and keep that split all year.

Does this apply to you?

If you have employees who are owed overtime under federal law, yes. The statute’s definition is narrow. Qualified overtime is pay “required under section 7 of the Fair Labor Standards Act of 1938” that exceeds the employee’s regular rate ^[4]. Under the Labor Department’s overtime fact sheet, that means at least time and one-half the regular rate for hours over 40 in a workweek, and a workweek is a fixed, recurring seven-day period; you can’t average hours over two weeks ^[5].

A hypothetical HVAC contractor with four hourly technicians. One technician earns a regular rate of $30 an hour and works 45 hours in a workweek during a heat wave. The five overtime hours pay $45 each. Only the premium, $15 an hour, or $75 for that week, belongs in the code TT running total ^[2]. The full $225 for those hours is still wages, with all the usual withholding ^[2].

A hypothetical diner with servers and a line cook. The servers’ reported cash tips go in box 12 code TP, with their occupation code in box 14b ^[2]. If the line cook picks up overtime, that premium goes in code TT. Tips and overtime are kept apart: the law says qualified overtime does not include any qualified tip ^[4].

The Labor Day wrinkle. The federal overtime law doesn’t require extra pay for working on a holiday or weekend as such ^[5]. Plenty of businesses pay holiday time-and-a-half anyway, by policy or contract. Whether that premium counts as qualified overtime isn’t answered by the documents here, given the statute’s “required under section 7” wording ^[4]. Treat it as a question for your payroll provider or preparer, not an assumption.

What to do before year-end

Here’s the short version. Find out now, not in January, whether your payroll system tracks overtime premium separately from regular pay. If it doesn’t, fixing it in September means three-plus months of clean records instead of a year-end reconstruction.

The IRS’s National Payroll Week release also restates the basics ^[1]. Deposit federal employment taxes electronically through EFTPS, Direct Pay for businesses or Business Tax Account ^[1]. Keep employment records for at least four years ^[1]. And verify any request to change an employee’s direct deposit “through a trusted channel,” the IRS says, because payroll systems draw phishing attempts ^[1].

If you file your own W-2s, remember from the column on the IRS’s 1099 filing system that the e-file requirement counts W-2s and 1099s together. The draft instructions set Feb. 1, 2027, as the due date for filing 2026 W-2s with the Social Security Administration, on paper or electronically ^[2].

What I’m keeping an eye on

Sept. 8. The IRS is holding a free webinar for payroll professionals, “IRS and Payroll Professionals – Partners in Every Paycheck,” covering Trump account employer contributions and 2026 Form W-2 reporting changes ^[1]. Watch for anything said about how employers should handle edge cases in code TT.

The final 2026 W-2 instructions. What’s out now is a January draft, and the IRS warns that drafts of instructions usually change before release ^[2]. I’ll be checking whether the final version adds detail on what counts as qualified overtime, or any relief for 2026.

— Sally