How should employers calculate the “qualified overtime” premium when employees receive non‑discretionary bonuses or different state overtime rules?
Executive summary
Qualified overtime compensation refers to the “premium” portion of FLSA overtime pay—the extra half‑time paid for hours worked over 40 in a workweek—and employers must base that premium on the employee’s FLSA “regular rate,” which now explicitly includes most non‑discretionary bonuses; reporting changes beginning in 2026 make precise tracking and separate reporting of that premium required [1] [2] [3]. The Department of Labor’s January 2026 opinion letters and recent employer guidance leave little room to treat production, attendance, longevity or incentive bonuses as discretionary for overtime‑calculation purposes, so payroll systems and state‑law considerations must be reconciled to avoid underpayment and reporting errors [4] [5] [6].
1. What “qualified overtime” and the overtime premium actually mean under the new rules
“Qualified overtime compensation” for reporting and the No‑Tax‑on‑Overtime rules is the portion of overtime that is the premium above the regular rate—the half‑time portion of a time‑and‑a‑half overtime payment—and the IRS/legislative changes require employers to report that premium separately on the W‑2 beginning in tax year 2026 (draft W‑2 Box 12 Code TT) so employees can claim the deduction; employers must therefore isolate the half‑time amount from gross wages for reporting purposes [1] [6] [2].
2. Non‑discretionary bonuses must be folded into the regular rate—what that means in practice
The DOL’s January 2026 opinion letters reinforce that payments tied to productivity, attendance, safety or similar metrics are non‑discretionary and must be included in the FLSA regular rate; when those bonuses are paid in a workweek in which overtime is worked, the total earnings (hourly pay plus the non‑discretionary bonus) divided by hours worked produces the regular rate used to compute the 1.5x overtime amount [4] [5] [3].
3. How to compute the qualified overtime premium with bonuses—formula and a compact example
Compute total straight‑time earnings for the workweek including any non‑discretionary bonuses, divide by total hours worked to get the regular rate, multiply that regular rate by 1.5 for overtime pay, then isolate the “half‑time” premium (overtime pay minus straight‑time pay) to determine qualified overtime; for example, an employee with a $12 base and a $9.50/hour non‑discretionary productivity add‑on has a $21.50 regular rate, a $32.25 overtime rate for extra hours, and a $10.75 per‑hour half‑time premium that must be tracked and reported (the DOL Opinion uses precisely this illustration) [4] [7].
4. When state rules differ: overlaying state overtime laws on the federal regular‑rate requirement
States can and do expand overtime or define regular‑rate differently (California has detailed methods and interpretations for bonuses and overtime calculations), so employers must reconcile state law pay rules with FLSA regular‑rate inclusion of non‑discretionary bonuses—practical compliance means applying whichever rule is more protective of the employee for wage entitlement while still isolating the federal qualified overtime premium for reporting [8] [2] [3]. If a state requires daily overtime or a different multiplier, employers must calculate pay to satisfy the state obligation and then determine the federal half‑time component for reporting and any federal deduction rules as separate steps [8] [1].
5. Payroll systems, reporting and practical steps employers must take now
Employers must update payroll codes to separate base wages from overtime premium, configure systems to add non‑discretionary bonuses into the regular‑rate calculation, and be ready to populate Box 12 Code TT on the 2026 W‑2 (or provide reasonable approximations during transition relief); payroll vendors, audits of pay rules, and staff training are repeatedly recommended in practitioner guidance to avoid underpayment and incorrect reporting [6] [9] [3].
6. Risks, employee scrutiny, and mitigation strategies
Because the OBBBA deduction and new reporting create employee incentives to inspect regular‑rate calculations, misclassifying bonuses or failing to include them risks wage‑and‑hour claims as well as reporting disputes; mitigation includes clear written bonus policies that distinguish discretionary from non‑discretionary bonuses, internal audits, voluntary supplemental statements to employees, and consultation with counsel or payroll providers—agencies have offered transition relief but additional IRS/DOL guidance is expected and open questions remain [5] [9] [10].