No Tax on Overtime: What the OBBB Deduction Actually Means for Employers

The One Big Beautiful Bill Act (P.L. 119-21), signed July 4, 2025, created a new below-the-line federal income-tax deduction for the FLSA-premium portion of overtime — capped at $12,500 per individual ($25,000 joint), phased out above $150,000 MAGI ($300,000 joint), claimed on new Schedule 1-A (Form 1040 line 13b) so it reduces taxable income without reducing AGI, and sunsetting December 31, 2028. The provision lives at new 26 U.S.C. § 225. The marketing name is "no tax on overtime." The mechanics are narrower and more complicated than that.

The reporting cost is on you. For tax year 2025 (W-2s issued January 2026), the IRS gave transition relief — no mandatory separate disclosure. For tax year 2026 (W-2s issued January 2027), it's mandatory: Box 12 code TT, "Total amount of qualified overtime compensation." Misreport the premium portion vs the full 1.5× check, include state daily overtime that doesn't qualify (see our overtime rules by state guide for what qualifies federally vs at the state level), or fold in exempt-employee policy "overtime" that doesn't qualify, and you've inflated the deduction for your employees on the return. The penalties under IRC § 6721 and § 6722 for incorrect information returns are $310 per form, capped at $3.78M per year per employer (2026 figures). The Joint Committee on Taxation scored the OBBB no-tax-on-overtime + no-tax-on-tips package at approximately $121 billion in foregone federal revenue over the 10-year budget window (FY2025–2034) — roughly $89 billion attributable to the overtime deduction and ~$32 billion to the tips deduction, both with current-law sunsets after 2028. The Tax Policy Center estimates approximately 17 million filers will benefit from the overtime deduction. It is a benefit Treasury and the IRS are now policing through information-return accuracy.

Estimate your savings →

Quick reference

• What's deductible: the FLSA premium (the 0.5× in time-and-a-half) on hours over 40 per workweek. Not the full 1.5× overtime check.
• Who qualifies: FLSA-nonexempt employees with valid SSN. Independent contractors, FLSA-exempt employees, and recipients of state-only overtime do not.
• Annual cap: $12,500 (single) / $25,000 (joint return). Below-the-line deduction on new Schedule 1-A (line 13b of Form 1040); reduces taxable income, not AGI. Available whether the taxpayer takes the standard deduction or itemizes.
• MAGI phase-out: deduction reduced by $100 per $1,000 of MAGI above $150,000 (single) / $300,000 (joint). Fully phased out at $275,000 / $550,000.
• Effective: tax years 2025–2028. Sunsets December 31, 2028 absent extension.
• Employer reporting: voluntary in 2025 W-2 Box 14; mandatory in 2026 W-2 Box 12 code TT.
• States that have decoupled (confirmed): California (FTB add-back, ~$3.2B/yr revenue impact), New York (IT-225 add-back codes), Illinois (OMB cites $267M revenue protection), Colorado (HB 25-1296 add-back, effective Jan 1, 2026). Massachusetts is evaluating; Connecticut and Hawaii are signaling non-conformity.

The 5 Most Expensive Misconceptions

1. "No tax on overtime" is not no tax. The deduction is the FLSA premium only — the extra 0.5× in time-and-a-half. On an employee earning $20/hr regular and $30/hr OT, only the $10/hr premium is deductible, not the full $30. FICA (Social Security + Medicare) is still owed on the full overtime check. State income tax may also still apply (see the map below). Workers who saw the headline and expected tax-free overtime checks are about to be disappointed; communicate proactively.

2. California, Washington, and other state-daily-overtime states get less. California's daily 8-hour overtime, daily double-time, and 7th-consecutive-day premium do not qualify under § 225(c) — the statute restricts qualifying overtime to "section 7 of the Fair Labor Standards Act," which is the federal weekly 40-hour rule only. California's 18 million-worker non-farm workforce (per CA EDD) includes the largest concentration of state-daily-overtime exposure in the country; a CA worker who racks up state-daily-OT but only modest FLSA-weekly-OT sees little federal deduction benefit. Combine with California's state-level decoupling ($3.2B/year revenue protected by the FTB add-back) and the practical benefit can be near-zero for the workers the headline was supposedly aimed at.

3. CBA premiums and policy "overtime" don't qualify. If your collective bargaining agreement requires 1.5× on hours over 8/day, 2× on Sundays, or 1.5× on holidays — none of that qualifies for the federal deduction unless it also happens to coincide with FLSA-required hours-over-40 overtime. Similarly for any employer-policy "overtime" paid voluntarily. The statutory text is narrow.

4. Exempt employees who get "overtime" don't get the deduction. FLSA § 13 exempts executive, administrative, professional, outside-sales, and certain computer employees from overtime requirements. An employer who voluntarily pays such an employee "overtime" for extra hours has paid wages, but those wages aren't FLSA-required. Box 12 code TT reporting must exclude these amounts. Including them is the most-likely-to-be-discovered reporting error since the W-2's other boxes will flag the exempt status.

5. Withholding doesn't change. The IRS did not update Circular E withholding tables for OBBB. Employees see the benefit at tax filing, not on each paycheck. With roughly 17 million filers expected to benefit from the deduction (Tax Policy Center estimate), the volume of "where's my bigger paycheck?" employee questions in Q1 2026 will be non-trivial. Workers expecting bigger checks starting "next pay period" will be told their employer is shorting them — even though nothing changed and the benefit lands at tax time. The single most-likely employee-relations friction point from this provision.

Estimate your federal tax savings and the W-2 Box 12 code TT amount under IRC § 225. Federal-only; state effects vary by jurisdiction. Defaults to a representative middle-of-distribution hourly worker.

Try a scenario

Typical hourly worker$25/hr · 5 OT/wk · $65k MAGICap binding$50/hr · 10 OT/wk · $90k MAGIHigh-earner phase-out$40/hr · 8 OT/wk · $200k MAGI

Your inputs

Filing status

Single (or head of household)Married filing jointly

Regular hourly rate ($)FLSA overtime hours per week

Weeks worked per yearModified AGI ($)

Estimated federal tax savings (tax year 2026)

Full deduction available

$715/ year

22% marginal federal rate × $3250 effective deduction

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Step-by-step math

FLSA premium per OT hour (0.5×)

$12.50

Annual qualifying premium (5 × 52 × $12.50)

$3250

Cap (single filer)

$12,500

Effective deduction

$3250

Marginal federal rate (approx.)

22%

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For your W-2

Box 12 · code TT

Reportable amount (uncapped)

$3250

The Box 12 amount is the uncapped annual qualifying premium — the cap applies to the employee's deduction, not to what the employer reports. Mandatory on 2026 W-2s issued January 2027.

Federal-only estimate. Excludes FICA (Social Security + Medicare still owed on the full overtime check) and state income tax effects (California and New York have decoupled — federal deduction added back on the state return). The marginal rate uses 2026 IRS brackets and approximates taxable income as MAGI minus the standard deduction. Married-filing-separately filers don't qualify for the deduction at all. Read the full methodology →

What OBBB actually says

The relevant statutory text is at 26 U.S.C. § 225, added by Section 70202(a) of P.L. 119-21. The definition that does the work — and that the rest of the regulation flows from — is in subsection (c):

"The term 'qualified overtime compensation' means overtime compensation paid to an individual required under section 7 of the Fair Labor Standards Act of 1938 that is in excess of the regular rate (as used in such section) at which such individual is employed." — 26 U.S.C. § 225(c)

Three subsections do the load-bearing work for the rest:

• § 225(a) grants the deduction: "There shall be allowed as a deduction for the taxable year an amount equal to the qualified overtime compensation received by the taxpayer during the taxable year."
• § 225(b) sets the cap and phase-out: $12,500 / $25,000 limit; $100 reduction per $1,000 of MAGI above $150,000 / $300,000.
• § 225(g) sunsets the deduction for tax years beginning after December 31, 2028.

Two phrases in § 225(c) carry the limits the marketing name papered over: "required under section 7 of the FLSA" excludes everything that isn't federally required overtime, and "in excess of the regular rate" restricts the deduction to the premium portion only, not the full overtime payment. Each phrase is doing work that costs taxpayers tens of billions of dollars in the aggregate — they are not throwaway prepositions.

Who qualifies, and how much

The deduction is below-the-line on the new Schedule 1-A to Form 1040 — it reduces taxable income, not AGI. Mechanically, Schedule 1-A line 38 flows to Form 1040 line 13b, which is then subtracted from AGI (line 11b) along with the standard or itemized deduction (line 12e) to arrive at taxable income (line 15). Schedule 1-A is available whether the taxpayer takes the standard deduction or itemizes. The fact that § 225 does not reduce AGI is load-bearing for state conformity — see the State conformity section below. Two procedural gates: valid Social Security number on the return, and married taxpayers must file jointly (filing married-separately disqualifies). The deduction is per return, not per worker — a household with two FLSA-overtime earners filing jointly shares the $25,000 cap, not $25,000 each.

Phase-out math worth running once: a single filer at $180,000 MAGI has $30,000 excess over the $150,000 threshold, which reduces the maximum $12,500 deduction by $3,000 to $9,500. A single filer at $275,000 MAGI is fully phased out. Joint phase-out is twice as forgiving: full deduction available through $300,000 MAGI, fully phased out at $550,000.

What counts toward Box 12 code TT (and what doesn't)

The single highest-leverage operational decision is which pay codes feed Box 12 code TT. Use this as a pre-flight checklist before tax-year 2026 closes:

Counts toward Box 12 code TT	Does NOT count
FLSA-required 0.5× premium on hours over 40 in a workweek	The 1.0× straight-time portion of the overtime check
FLSA premium for FLSA-nonexempt employees	Any "overtime" paid to FLSA-exempt employees (§ 13 exemptions)
Standard hourly, salaried-nonexempt, and piece-rate workers' FLSA OT	State daily-overtime (CA 8h, AK 8h, CO 12h, WA agricultural, etc.)
Properly-classified W-2 employees only	1099 contractors' pay (except misclassification edge cases)
FLSA premium even when employee works in a state that decouples	Daily double-time, 7th-consecutive-day premium, holiday premium
FLSA premium calculated using the proper regular rate (incl. bonuses)	CBA / union-contract premiums above the FLSA floor
FLSA premium paid in arrears for FLSA OT worked in the same tax year	"Comp time" / time-off-in-lieu (no cash overtime paid)

The single line that captures all of this: Box 12 code TT is the FLSA 0.5× premium, nothing more, nothing less.

Worked example: Box 12 code TT for one employee

Maria, an FLSA-nonexempt warehouse associate in Texas, earns $25/hr regular rate. Over tax year 2026 she works:

• 40 weeks at 40 hours flat (no overtime — 1,600 hours straight time)
• 10 weeks at 48 hours (40 hours straight + 8 hours FLSA overtime each week)
• 2 weeks at 50 hours (40 hours straight + 10 hours FLSA overtime each week)

Total FLSA-overtime hours for the year: (8 × 10) + (10 × 2) = 100 hours. Maria's overtime pay per hour is $37.50 (1.5 × $25), of which the 0.5× premium is $12.50. Box 12 code TT amount on Maria's 2026 W-2 = 100 × $12.50 = $1,250.00.

Maria's total overtime pay (the full 1.5×) for the year was $3,750. Notice the W-2 Box 12 TT figure ($1,250) is exactly one-third of her total overtime pay — that's the 0.5× / 1.5× ratio. If a payroll system reports Maria's full $3,750 in Box 12 TT instead of $1,250, it has overstated qualified overtime by $2,500. Maria's federal return would then claim a deduction $2,500 larger than she's entitled to — and the employer has filed an incorrect W-2 subject to § 6721 penalties.

Now consider Maria with the same hours but located in California instead of Texas. Her FLSA-required overtime is still 100 hours (same federal weekly-40 rule). But suppose 30 of those federal-OT hours overlapped with California's daily 8h overtime — those 30 hours already triggered state-OT premium even before they triggered the FLSA premium. Maria's Box 12 code TT amount on her W-2 is still $1,250 (the FLSA premium portion is identical regardless of state). The fact that her California daily-OT premium also applies for state-tax purposes is on her state return, not her W-2 federal box.

How this stacks with "No Tax on Tips"

OBBB Section 70201 created a parallel deduction for qualified tip income (new IRC § 224), capped at $25,000 with the same MAGI phase-out, also below-the-line on Schedule 1-A, also sunsetting December 31, 2028. Tipped employees in occupations on the IRS qualified-tip-occupation list can claim both deductions on the same return — § 225 against FLSA premium overtime and § 224 against tips — subject to each one's separate cap. Each deduction has its own W-2 box (Box 12 code TT for overtime; Box 12 code TP for tips that qualify, plus code TS for tips from specified service trades or businesses that don't qualify), so payroll systems must isolate both. The two phase out at the same MAGI thresholds, so a high earner phasing out of one is phasing out of the other. Worth a sentence in employee FAQs at restaurant, hospitality, and salon employers; otherwise tipped workers may not realize both apply.

W-2 / 1099 reporting requirements

Tax-year 2025 W-2s (issued January 2026) carry no mandatory new fields. The IRS Notice 2025-69 explicitly preserves the existing W-2, 1099-NEC, 1099-MISC, and 1099-K forms unchanged for 2025. Employees calculate their own deduction from pay records and the IRS FS-2026-01 Q&A Schedule 1-A instructions. Employers may voluntarily report 2025 qualified overtime in Box 14 with a suggested label "FLSA OT Prem"; failure to do so is covered by penalty relief under Notice 2025-62.

Tax-year 2026 is where the load shifts to employers. The IRS finalized the 2026 Form W-2 on January 12, 2026 with a new Box 12 code TT: "Total amount of qualified overtime compensation." The amount reported is the FLSA premium portion only — the 0.5× in time-and-a-half, not the full 1.5× overtime check. Statutory basis for the reporting requirement is IRC § 6051(a)(19); the parallel 1099 requirement under § 6041(d)(4) updates Forms 1099-NEC and 1099-MISC for the limited misclassification edge case.

Reporting accuracy matters because the penalty for incorrect information returns under § 6721 is $310 per form (2026 figures), capped at $3.78M per year per filer. An employer with 200 hourly workers who folds California daily overtime into Box 12 code TT for all 200 W-2s has overstated qualified overtime on 200 returns; each return is a separate penalty exposure.

State conformity

State income-tax treatment of the federal deduction depends on two things: (1) where the state's income-tax base starts on the federal return — federal AGI (Line 11b) or federal taxable income (Line 15) — and (2) whether the state legislature has decoupled. Because § 225 is below-the-line (it reduces federal taxable income but does NOT reduce federal AGI), a state that starts from federal AGI does NOT pick up the deduction automatically; a state that starts from federal taxable income does — unless the state legislature has explicitly added it back.

State-level treatment of the federal § 225 overtime deduction (May 2026). Decouplers require federal add-back on the state return; no-income-tax states are moot at the state level; uncolored states default to general conformity or pending guidance.

Four states have confirmed decoupling (explicit add-back legislation or guidance). All four require the federal § 225 deduction to be added back when calculating state taxable income:

• California — Franchise Tax Board add-back. CA estimates roughly $3.2 billion in annual revenue would otherwise be lost. California workers — who already have the deepest non-qualifying overtime exposure (daily 8h, daily double-time, 7th-day premium) — get the worst combined posture: little federal benefit on most of their overtime, and no state benefit on the rest.
• New York — IT-225 add-back codes. The 2026 IT-225 (state add-back / subtraction schedule) has new codes for "Add-back of exempt overtime pay" and "Add-back of exempt tip income." Governor Hochul has separately proposed a state-level exemption for tipped income (SB S587-A, introduced January 2026) — that proposal targets tips only and does not extend to overtime; the IT-225 add-back of federal exempt overtime remains in place.
• Illinois — non-conformity (Illinois Department of Revenue / Illinois OMB). Illinois OMB cited approximately $267 million in state revenue protection as the policy rationale. For 2026, Illinois employers must implement dual-track reporting: separate calculations for federal taxable income (with the OBBB deduction applied) and Illinois state taxable income (with the OBBB amount added back).
• Colorado — HB 25-1296 add-back, effective Jan 1, 2026. Colorado House Bill 25-1296 requires individuals to add back any overtime compensation deducted on IRS Schedule 1-A when calculating Colorado taxable income. The Colorado DR 0104 return adds a line for "Excess federal deduction for overtime pay."

Other states evaluating non-conformity (as of Q2 2026). Massachusetts is reviewing decoupling legislation; the MA Comptroller projects approximately $664 million in state-revenue cost if the federal deduction flows through. Connecticut and Hawaii have signaled non-conformity per industry reporting; primary state DOR guidance is pending.

Static-conformity states without affirmative legislation default to no state-level benefit. Virginia and Wisconsin are the canonical examples. Their statutes adopt the IRC as of a fixed date (typically the prior year), and any post-date IRC changes — including OBBB's § 225 — don't flow through until the legislature acts to update the conformity date.

No-income-tax states are moot. Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming don't tax wage income at all, so the state-conformity question doesn't apply. Workers in these states get the federal deduction without any state-side wrinkle.

Other rolling-conformity states. A state that starts from federal taxable income (Form 1040 Line 15) and has not decoupled will pass the deduction through automatically. A state that starts from federal AGI (Line 11b) does NOT pass it through, because § 225 is below AGI. Each employer should verify the specific posture for every state they pay employees in — the article's confirmed-decoupler list is the floor, not the ceiling, and state DOR guidance is still being issued through 2026.

State-specific guidance through state Departments of Revenue is still rolling out as of Q2 2026; the practical message for HR managers is "check your state's January 2026 instructions before finalizing payroll posture." This article maintains the confirmed-decoupler list; flag the article for an update when your state's primary DOR posts decoupling or conformity guidance.

Multi-state and remote workers

The federal deduction is identical regardless of where the employee physically works — it's federal income tax, sourced to the employee's federal return. State income-tax treatment, on the other hand, is sourced to the state where the employee works (with narrow exceptions for some reciprocal arrangements). For the deeper treatment of how state overtime rules vary, see our overtime rules by state guide; for cases where off-the-clock pay retroactively cascades into FLSA-required overtime (and therefore into the § 225 deduction), see our off-the-clock work by state guide.

Practical implication for a Texas-headquartered company with a California remote employee: the employee gets the federal deduction on their 1040 (TX has no state income tax for the worker, CA does). On the CA state return, the same FLSA-premium overtime will be added back per CA's decoupling. The employee's combined effective tax savings is smaller than the headline number, even though the federal deduction itself works normally.

For payroll-team posture: state withholding stays governed by work location (subject to the usual mobility and reciprocity rules), and 2026 W-2 Box 12 code TT reporting is identical regardless of work-state. The asymmetry is purely on the state-return side and is the employee's problem to navigate.

Recent changes

Six events have shaped the OBBB overtime-deduction rollout from signing to sunset. The first two W-2 reporting events (tax-year 2025 voluntary and tax-year 2026 mandatory) are the load-bearing compliance dates; the state-DOR guidance is still rolling out as of Q2 2026.

• July 4, 2025 — OBBB signed into law (Public Law 119-21). Section 70202(a) of P.L. 119-21 adds the qualified-overtime-compensation deduction to the Internal Revenue Code as new 26 U.S.C. § 225. Effective retroactively to tax years beginning January 1, 2025.
• November 21, 2025 — IRS Notice 2025-69 — 2025 transition relief. IRS confirmed that 2025 Forms W-2, 1099-NEC, 1099-MISC, and 1099-K are unchanged for the 2025 tax year. Employees calculate the deduction themselves from pay records. Employers may voluntarily disclose qualified overtime in Box 14 of the 2025 W-2 (suggested label "FLSA OT Prem"). Penalty relief for non-disclosure issued in Notice 2025-62.
• January 12, 2026 — IRS releases finalized 2026 Form W-2 with Box 12 code TT. New Box 12 code TT — "Total amount of qualified overtime compensation" — becomes mandatory for tax year 2026 (W-2s issued January 2027). Amount reported is the FLSA premium portion only (the 0.5×), not the full 1.5× overtime pay. Forms 1099-NEC and 1099-MISC are similarly updated for the misclassification edge case.
• January 2026 — IRS Fact Sheet FS-2026-01 — taxpayer Q&A. IRS published a question-and-answer fact sheet addressing the most common taxpayer questions: cap math, MAGI phase-out, single vs joint filing requirements, Schedule 1-A line item. Several mechanical questions remain pending (retroactive back-pay, bonus recharacterization, weighted-average regular-rate interactions with shift differentials).
• Q1–Q2 2026 — state DORs publish conformity guidance; four states confirm decoupling. California Franchise Tax Board and New York Department of Taxation and Finance issued explicit add-back guidance. Illinois decoupled (Illinois OMB cited $267M revenue protection); Colorado decoupled via HB 25-1296 (effective Jan 1, 2026), adding a "Excess federal deduction for overtime pay" line to the DR 0104. Massachusetts is evaluating non-conformity ($664M projected revenue cost per MA Comptroller); Connecticut and Hawaii are signaling non-conformity per industry reporting but primary state DOR guidance is pending. Static-conformity states without affirmative legislation default to no state-level benefit. State-specific guidance is still rolling out as of May 2026.
• December 31, 2028 — sunset — deduction terminates. IRC § 225(g) sunsets the deduction for tax years beginning after December 31, 2028. Four tax years available: 2025, 2026, 2027, 2028. Absent a Congressional extension, qualified overtime compensation becomes ordinary taxable income again starting tax year 2029.

If You Discover You've Been Doing This Wrong

Most of the reporting risk is forward-looking: tax-year 2026 W-2s (issued January 2027) are the first compliance event with mandatory Box 12 code TT. For now, the action items are setup and audit, not remediation.

1. Audit payroll system pay-code tracking. Confirm the system can isolate the FLSA-premium portion (0.5× above regular rate on FLSA-required overtime) separately from regular-rate pay, from state-only overtime (CA daily, WA daily, etc.), from double-time, from CBA premiums, and from any exempt-employee policy "overtime." Major payroll vendors (ADP, Gusto, Paychex, Rippling, isolved) released OBBBA-ready updates through late 2025; if you're on a legacy or custom payroll system, verify Box 12 code TT support before the 2026 plan year closes.

2. Reconfigure overtime categorization. The pay codes that feed into Box 12 code TT must exclude every dollar that isn't FLSA-required. The most-missed category is California daily 8h overtime treated as if it qualified. Audit each pay code against § 225(c)'s "section 7 of the FLSA" requirement.

3. Identify FLSA-exempt employees getting policy "overtime." Pull the exempt-status flag from your employee master file and cross-reference with any pay codes labeled "overtime." Any policy "overtime" paid to exempt employees must be excluded from Box 12 code TT, even if the math looks identical to a non-exempt employee's FLSA overtime.

4. Decide on 2025 voluntary disclosure. Notice 2025-69 makes 2025 reporting optional. Most employers should skip it — calculating QOC from pay stubs is straightforward for employees who care, and voluntary disclosure introduces inquiry risk if the methodology is later judged wrong. If you choose to disclose, use the IRS-suggested Box 14 label "FLSA OT Prem" and document the methodology.

5. Update employee communications proactively. Year-end materials, pay-stub explainers, and FAQ pages should flag the four most common misconceptions: (1) no withholding change, (2) only the 0.5× premium, (3) state overtime doesn't qualify, (4) sunset in 2028. The communications cost of a confused workforce dwarfs the reporting cost of getting Box 12 right.

6. Set a state-decoupling watch. California and New York are confirmed decouplers. State DOR guidance is still rolling out through 2026 in many other states. Subscribe to or monitor the state DOR bulletins for every state you have employees in; a state decoupling mid-year materially changes payroll-team communications even though it doesn't change W-2 reporting.

7. If a 2025 misreporting error is discovered post-filing, the relief mechanism is a corrected W-2 (Form W-2c) — but Notice 2025-69 explicitly bypasses mandatory 2025 reporting, so most "errors" don't exist as such. The exposure rises materially with the 2026 W-2.

The through-line

"No tax on overtime" is the marketing name. The mechanics are a capped, phased-out, four-year deduction of the FLSA-premium portion of overtime — and every misreporting risk traces back to two phrases in § 225(c): "required under section 7 of the FLSA" and "in excess of the regular rate." Make sure your payroll system isolates exactly that slice — the 0.5× premium on hours over 40 per workweek for FLSA-nonexempt employees — from everything else, and the rest of the compliance work follows. Get either phrase wrong on the W-2 and the inflated deduction becomes 200+ incorrect information returns at $310 each. The compliance window opens in earnest with 2026 W-2s issued January 2027 and closes for tax-year 2029 absent Congressional extension.

The good news: the pay-code separation work is the same compliance you'd do for accurate FLSA regular-rate calculations regardless of OBBB. If Congress extends or makes the deduction permanent in 2028, the audit work doesn't need to be redone. If it expires, you have cleaner payroll data anyway. Build it now and it earns its keep either way.

Sources

Federal statute and Treasury / IRS guidance

• 26 U.S.C. § 225 — Qualified overtime compensation (Cornell LII)
• IRS — One Big Beautiful Bill Act: tax deductions for working Americans and seniors
• IRS Fact Sheet FS-2026-01 — Q&A on the qualified overtime compensation deduction
• IRS Notice 2025-69 — 2025 transition relief (PDF)
• IRS — What to know about the No Tax on Overtime deduction
• DOL Wage and Hour Division — Overtime Pay (FLSA § 7)

Form W-2 / 1099 reporting

• PayrollOrg — IRS releases 2026 Form W-2 with OBBBA changes (Jan 12, 2026)
• 26 U.S.C. § 6051 — Receipts for employees (statutory basis for W-2 reporting)

Employer-side analysis

• Morgan Lewis — OBBBA Qualified Overtime Compensation FAQs for Employers (Aug 2025)
• Grant Thornton — IRS issues FAQs on new overtime pay deduction (Feb 2026)
• Baker McKenzie / The Employer Report — 2025 transition relief (Dec 2025)

State conformity

• Colorado Department of Revenue — January 2026 Tax Policy Updates (HB 25-1296 overtime add-back)
• Massachusetts Office of the Comptroller — No-Tax Overtime Provision under OBBBA announcement
• Thomson Reuters — How states are implementing OBBBA tax law changes
• Thomson Reuters — Which states are decoupling from federal tax provisions