What payroll system changes do employers need to implement to populate W‑2 Box 12 code TT for 2026?
Executive summary
Employers must update payroll systems to separately track and report "qualified overtime compensation" so it can be output to W‑2 Box 12 using new code TT beginning with tax year 2026 (W‑2s issued January 2027) as formalized on the draft and finalized 2026 Form W‑2 and IRS instructions [1] [2]. Practical changes include creating dedicated earning codes, changing data fields and mappings to populate Box 12 with code TT, and validating calculations and year‑end feeds with payroll vendors well before the 2026 year‑end [3] [4].
1. What Code TT is and the reporting deadline employers face
Code TT is the new Box 12 entry the IRS designates to report the total amount of qualified overtime compensation that employees may deduct under the One Big Beautiful Bill Act (OBBBA) for tax years 2025–2028, and the 2026 W‑2 form and IRS instructions explicitly add that code [1] [5]. The IRS’s finalized 2026 W‑2 incorporates Box 12 TT and signals that, while the IRS gave transition relief for tax year 2025, employers must implement formal reporting for tax year 2026 and thereafter [4] [6].
2. Data capture: create separate earning codes to isolate qualified overtime
Payroll systems must start recording qualified overtime as a distinct payroll element (earning code) separate from regular overtime and base pay so an aggregate for the year can be produced for Box 12 TT; multiple vendors and advisory firms recommend adding or reconfiguring earning codes to capture the “amount that exceeds the regular rate” that qualifies under the FLSA definition [3] [1]. Several software vendors and consultants advise employers to plan these earning‑code changes now and to map them to W‑2 reporting fields ahead of 2026 [3] [7].
3. System mapping and W‑2 output: mapping earning codes to Box 12 code TT
Payroll and HRIS must include a W‑2 output mapping that takes the aggregate of the new qualified‑overtime earning code and populates Box 12 with code TT; the IRS draft/final W‑2 explicitly lists TT as the Box 12 code for total qualified overtime compensation [1] [8]. This requires updates to year‑end reporting routines, the W‑2 generation templates, and any third‑party file formats used to transmit W‑2 data to vendors or the IRS [9] [2].
4. Calculation rules and employee/job data needed to determine qualification
Systems must be able to identify which overtime components qualify — essentially the “amount that exceeds the regular rate” such as the half‑time portion of time‑and‑a‑half — and attribute that dollar amount to the qualified‑overtime earning code across pay periods [1]. Employers should document and encode the business logic (regular rate identification, exclusions, and any state‑law variations) in payroll calculations or interfaces so the annual TT total is auditable [1] [10].
5. Vendor coordination, testing and timing: practical rollout steps
Employers must coordinate with payroll vendors or internal IT to patch systems, add earning codes and mappings, and run test year‑end W‑2s that include Box 12 code TT to confirm both per‑employee aggregates and file layouts; industry guidance recommends making these changes before 2026 and testing well in advance of year‑end [3] [4]. Many vendors signaled they will deliver mapping utilities (e.g., SOC/TTOC mapping for tipped occupations and analogous support for TT), making early engagement with vendors essential [7] [4].
6. Risks, transition relief and alternative approaches employers are weighing
The IRS provided transition relief for 2025 reporting, and some practitioners recommended temporary reporting in Box 14 or on supplemental statements for the 2025 year, but that relief does not extend to 2026, when Box 12 TT becomes required — that means informal workarounds are not sufficient longer term [6] [10]. Employers balancing cost and compliance may differ on whether to build internal logic or rely on vendor updates; hidden agendas exist in vendor guidance that favors paid upgrade paths, so firms should get written timelines and scope commitments [3] [7].