Qualified overtime deduction: which part of your overtime counts

The deduction is for qualified overtime compensation: overtime pay the FLSA requires under section 7 that is in excess of the regular rate. Time and a half is two things on one line — the regular rate for the hour, which any hour of work earns, and half of it again on top. Only the half on top is in excess of the regular rate, and only as much of it as the FLSA requires. The 2026 Form W-2 instructions say the same in one line: code TT carries the “half” of time and a half.

Two details move the number. The workweek is a fixed 168 hours that stands alone: 45 hours one week and 35 the next are five qualifying hours, not zero (Q13). And the regular rate is the week’s pay for employment divided by its hours, so a shift differential or a nondiscretionary bonus raises the half along with the rate (Q15).

Take $30.00 an hour and a California week of a 13-hour Monday and four 8-hour days: 45 hours. California pays Monday’s ninth to twelfth hours at time and a half and the thirteenth at double time. Those five hours already carry a daily premium, so the weekly rule finds only 40 straight-time hours and adds nothing. The pay stub shows $240.00 of overtime, and it splits like this:

The FLSA looks at the week, not the day. 45 hours is 5 hours past 40, and the half on those hours is $75.00 — that is the qualified overtime. The $15.00 California paid above it, the second half-rate on the thirteenth hour, is real pay owed under state law, and it is not qualified. Cut Friday to 3 hours and the week is 40 hours: the 13-hour Monday still earns $90.00 of daily premium, and none of it qualifies, because the week never passed 40.

The same engine, the same split, across the rules that make overtime more than a weekly count. Daily overtime, the seventh day and double time change what a week pays, not what qualifies: the qualified half is still half the regular rate for each hour past 40, and whatever they pay beyond it is not qualified.

From tax year 2026 employers report qualified overtime in box 12 of Form W-2 with code TT (FS-2026-13 Q6, Q10). The box holds the year’s whole qualified amount even when it is more than the deduction allows — the IRS’s example is $30,000 reported in full — and Part III of Schedule 1-A then applies the cap and the phase-out (Q19).

The W-2 is also the ceiling. For 2026 onward only what box 12, code TT reports can be deducted (Q20). If the figure is too low, the fix is a corrected Form W-2c from the employer; a substitute Form 4852 cannot stand in for it (Q22, Q23). If it is too high, only the qualified overtime actually paid counts (Q21).

Tax year 2025 had no code TT. An employer could show the amount in box 14 or on a separate statement, and without one, Notice 2025-69 lets you use a reasonable method. Its fractions are the split above in other words: when overtime is paid at time and a half and a year-end statement shows one total for the hours past 40, one-third of that total is the qualified half; when it is paid at double time, one-quarter.

Only an FLSA overtime-eligible employee’s: someone covered by the Act and not exempt from its overtime rule (FS-2026-13 Q4). An exempt salaried manager paid overtime by company policy, or a worker exempt under federal law but owed overtime under state law, receives no qualified overtime at all — Notice 2025-69 says this holds regardless of state law.

Some workers have their overtime counted differently, and the IRS follows their rule: hospital and residential-care staff on an 8-and-80 arrangement, police and firefighters on a work period under section 7(k), public employees paid in comp time, and federal employees under OPM’s regulations (Q17, Q18, Q26–Q30). The calculator on this page applies the standard 40-hour workweek.

Claiming it takes a Social Security number valid for employment, and a married couple must file jointly (Q24, Q25). It is available whether you itemize or take the standard deduction (Q1).

It lowers federal taxable income; it does not make overtime tax-free. Overtime is still wages: income tax is withheld from it, and Social Security and Medicare apply to all of it (FS-2026-13 Q1, Q8). Withholding falls only if you give your employer a new Form W-4 — the 2026 form takes the expected deduction in step 4(b) (Q9).

So this page stops at the split. What the half is worth on a return depends on the bracket, the other deductions and the MAGI on it, which is Schedule 1-A’s work and not a calculator’s.

The cap is per return: $12,500, or $25,000 on a joint return, however many jobs earned it. At $30.00 an hour the half is $15.00 an hour, so reaching the cap takes 834 hours past 40 in one tax year — about 16 every week of the year.

The phase-out runs on modified adjusted gross income. Schedule 1-A subtracts $100 for each full $1,000 of MAGI over $150,000 ($300,000 joint), dropping any partial thousand, so a full $12,500 deduction reaches zero at $275,000 of MAGI, and a full $25,000 joint deduction at $550,000.