How should overtime premiums vs. regular overtime pay be reported on W-2 and payroll records?
Executive summary
For tax years 2025–2028, only the premium portion of FLSA overtime—the “half” in time-and-a-half—qualifies for the new deduction and must be tracked as “qualified overtime compensation” even though 2025 W-2s are not required to separately show it [1] [2] [3]. The IRS issued transition relief for 2025 that lets employers furnish qualified overtime amounts by a reasonable method (Box 14, separate statement, or portal) while mandatory, standardized W-2 reporting (e.g., a Box 12 code) is expected beginning in 2026 [4] [5] [3].
1. What counts as the overtime premium and why it matters
Qualified overtime compensation is the premium required by the Fair Labor Standards Act—the extra 0.5x above the regular rate when an employee is paid “time-and-a-half”—and only that premium is eligible for the deduction and eventual separate reporting, not all overtime dollars or state-specific overtime above FLSA minimums [1] [6] [7].
2. The temporary 2025 reporting regime and IRS relief
For tax year 2025 the IRS provided transition relief: employers are not penalized for failing to include a separate qualified overtime amount on Forms W-2 and 1099 while payroll systems are updated, but they must still ensure accurate underlying payroll records that distinguish FLSA-required premiums from other pay [3] [8] [7].
3. What employers must do in payroll systems now
Employers should update payroll processes to segregate the FLSA overtime premium from base wages and other premiums, maintain weekly/hour-level records that support the calculation, and be prepared to report a year‑end total of qualified overtime either on a revised W-2 format in 2026 or by a “reasonable method” (Box 14, separate statement, or electronic access) for 2025 [7] [4] [6].
4. How amounts will appear on W-2s and other statements
Draft IRS guidance and payroll-processor guidance indicate the qualified overtime total will likely be reported on W-2 Box 12 using a new code (draft “TT”) in future years, but for 2025 employers may report it in Box 14, on an attached year‑end statement, or via employee portals as an acceptable interim method [4] [5] [9].
5. Practical employer and payroll-provider choices during transition
Many payroll vendors and employers will not have 2025 W-2 solutions in place, so practical options include: (a) calculate the premium exactly by isolating the one-half portion of each overtime payment using weekly regular-rate math; (b) where historical payroll shows combined overtime, use the IRS-allowed reasonable estimation (e.g., divide combined 1.5x overtime by three to get the 0.5x premium) for 2025; and (c) communicate clearly to employees with a statement showing the qualified overtime total so employees can claim the deduction [10] [5] [11].
6. What employees should expect and do to claim the deduction
Employees should look for a separate qualified overtime amount on their W-2s beginning in 2026, but for 2025 they must rely on employer statements, year-end paystubs, or reasonable self-calculation methods if the employer did not separately report the premium; employers’ continued withholding and reporting of gross wages and payroll taxes remains unchanged [5] [3] [12].
7. Compliance risks, gray areas and alternative views
Risk areas include misclassifying state-only overtime as “qualified” (only FLSA-required premiums qualify), failing to capture nondiscretionary pay that affects the regular rate, and inconsistent payroll-provider implementations—some advisers emphasize there is no 2025 W-2 reporting requirement whereas others urge immediate system changes to be ready for 2026’s expected Box 12 code, so employers must weigh penalty relief against recordkeeping obligations and employee communication needs [13] [9] [7].