What "No Tax on Overtime" Actually Means

Why 'no tax on overtime' isn't actually no tax

The "no tax on overtime" law isn't a tax exemption. It's a federal income-tax deduction on just the extra half of overtime pay above your regular rate — not the whole overtime check. The cap is $12,500 per person ($25,000 joint return), phased out above $150K income, and expires after 2028. Social Security and Medicare still apply to the full check. State income tax depends on your state.

For employees: most see the benefit at tax filing, not in their paychecks — the IRS didn't change withholding tables. For employers: starting with 2026 W-2s (issued January 2027), you have to report the qualifying amount in Box 12 code TT. California, New York, Illinois, and Colorado kept their own rules — workers in those states still owe state income tax on the full overtime check.

What employers need to do for 2026 W-2s

• Confirm your payroll system can track the extra-half overtime portion separately.
• Exclude state-only overtime, like California daily overtime, from Box 12 code TT.
• Don't include any "overtime" you voluntarily pay to FLSA-exempt employees.
• Tell employees the benefit shows up at tax filing, not in their paycheck.
• If you're in CA, NY, IL, or CO — state income tax still applies.

Where employers will mis-report this

• California daily overtime in Box 12 code TT — overtime after 8 hours/day or 12 hours/day doesn't qualify federally.
• An "overtime" check to an exempt manager — voluntary policy overtime doesn't qualify, even if your handbook calls it overtime.
• The whole overtime check reported instead of just the extra-half part — inflates the deduction on every W-2.
• Voluntarily reporting wrong 2025 W-2 numbers — disclosing wrong figures invites IRS inquiry plus penalties.

When in doubt, leave it out of Box 12

Box 12 code TT only counts the extra-half part of FLSA-required overtime, paid to nonexempt employees for hours past 40 per week. If a pay code doesn't fit all three — FLSA-required, premium portion only, nonexempt worker — leave it out. The deduction shrinks; the penalty for inflating it doesn't.