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One Big Beautiful Bill Act Implementation

Qualified Overtime

Overview

The One Big Beautiful Bill Act (OBBBA) established a federal income tax deduction for qualified overtime for tax years 2025 through 2028. Employees may deduct qualified overtime on their income tax returns within the guidelines established by the Internal Revenue Service (IRS). Employees should consult their tax advisor when preparing their individual income tax returns.

What is "Qualified Overtime" or “Overtime Premium”?

Qualified overtime, also known as overtime premium, is only the premium portion, the extra "half" in time-and-a-half pay, required by the Fair Labor Standards Act (FLSA). When you work overtime at time-and-a-half, the base pay portion is your regular wages, while the additional 0.5 premium may qualify for the tax deduction (speak with a tax professional to learn more).

For example: If your regular rate is $20 per hour, overtime is paid at $30 per hour. Only the $10 per hour premium portion is qualified overtime. A simple calculation: your total annual overtime pay divided by 3 equals your qualified overtime amount.

2025 Implementation (Transition Year)

For tax year 2025, the state elected to report qualified overtime in Box 14 of your W-2 labeled as "QUAL OT." This included overtime paid through standard overtime codes (bi-weekly, monthly, and shift overtime), call-back overtime, and compensatory time payouts. The IRS allows employers to provide a reasonable estimate of qualified overtime for employee deductions, delaying mandatory, precise W-2 reporting until 2026. Employers are not required to change 2025 W-2 reporting, as transition relief applies.

2026-2028 Implementation (Full Compliance)

Beginning with tax year 2026, separate reporting of qualified overtime became mandatory following updated IRS guidance issued in November 2025. Enhanced system tracking was implemented to include compensatory time used (in addition to payouts) in the qualified overtime calculation. All non-exempt employees' overtime premium will be reported in box 12 using code TT, ensuring you receive the maximum federal tax benefit available under this program.

What Overtime Qualifies?

  • Standard overtime (bi-weekly, monthly, shift)
  • Call-back overtime (when total hours exceed 40 in a workweek)
  • Compensatory time payouts and usage

What Doesn't Qualify?

  • Incident response assignment pay
  • Call-back pay when total hours remain under 40 in a workweek
  • Other premium pay not required by FLSA

Questions

  • For questions about your specific qualified overtime reporting, contact your agency payroll professionals.