Significant shifts in payroll and tax reporting are on the horizon, driven by the mandates within the One Big Beautiful Bill Act (OBBBA) signed last July.
One of the most impactful changes for 2026 is the new requirement surrounding how Overtime Premium Amounts are tracked and reported.
Under the OBBBA, a federal tax exemption on overtime earnings is now in effect. This temporary measure applies to all overtime pay processed between January 1, 2025, and December 31, 2028. This credit specifically covers the “extra half” of time-and-a-half pay. Employees claim this benefit on their individual tax returns.
Suppose a worker earns a base rate of $20.00 hourly, bringing their time-and-a-half pay to $30.00. In this scenario, the $10.00 “overtime premium” represents the portion qualifying for the tax break. This incentive is strictly tied to “eligible overtime pay” as regulated by Fair Labor Standards Act (FLSA) guidelines. Employers will still withhold federal, state, and local taxes normally, as the deduction applies on the employee’s tax return, not at payroll withholding.
Employers will be required to:
- Track the portion of overtime pay that exceeds the employee’s regular rate (the “half-time” portion).
- Ensure this amount aligns with the Fair Labor Standards Act (FLSA) definitions of qualified overtime.
- Report the total annual qualified overtime premium using Code TT in Box 12 of the W-2. (This is subject to future guidance from the IRS)
Navigating the new OBBBA requirements doesn’t have to be a burden. For expert support tailored to your business, please contact your IPS representative.