On August 6, 2026, the IRS published Fact Sheet FS-2026-13, an updated Q&A guidance document on the qualified overtime compensation deduction under IRC Section 225. FS-2026-13 supersedes FS-2026-01 (published in early January 2026). The update is confirmed from IRS IR-2026-88, the Mondaq/Liskow and Lewis analysis (published approximately 10 hours ago), Current Federal Tax Developments (4 days ago), CPA Practice Advisor (3 days ago), and NJBIA (3 days ago).
The significance of FS-2026-13 is not that it changes the deduction's mechanics. IRC Section 225, enacted by the OBBBA on July 4, 2025, governs the qualified overtime deduction for tax years 2025 through 2028. The deduction limits, MAGI phase-outs, and FLSA coverage requirements are unchanged. What FS-2026-13 changes is the employer's reporting obligation and the consequence of failing to meet it.
In 2025, the IRS allowed employees to self-report qualified overtime compensation that their employer failed to separately code in W-2 Box 12. IRS Notice 2025-69 established seven methods (Methods A through G) by which employees could reconstruct their qualified overtime amounts using pay stubs, personal logs, and other records. That relief was always intended as a temporary accommodation while employers updated their payroll systems.
As of January 1, 2026, that accommodation is gone. FS-2026-13 Q&A-22 is explicit: any amount not reported on Form W-2, Box 12, Code TT may not be considered for purposes of the deduction. Employees cannot self-report. They cannot substitute Form 4852. Their only path to the deduction for employer-unreported overtime is a corrected Form W-2c. And the obligation to issue the W-2c falls on the employer.
For corporate controllers and payroll teams, this is the most consequential payroll compliance development of 2026. This post covers what FS-2026-13 changed, why the employer liability is now real, how to calculate the exposure if Code TT was understated since January, and what to audit before December 31.
What Did IRS Fact Sheet FS-2026-13 Change on August 6, 2026?
FS-2026-13 makes five specific changes to the prior guidance in FS-2026-01.
First, Q&A-22 establishes the mandatory reporting rule for 2026 and later years: any amount of qualified overtime compensation not reported in Box 12 Code TT of the employer's Form W-2 may not be considered for purposes of the IRC Section 225 deduction. This is a categorical rule with no exceptions, no alternative methods, and no self-reporting fallback for tax year 2026 and forward.
Second, FS-2026-13 adds new detail on FLSA coverage and exemptions that FS-2026-01 did not address. The additional FLSA coverage guidance specifically addresses federal employees, state and local government employees (many of whom receive comp time rather than cash overtime under FLSA Section 7(o)), and white-collar exemptions that affect which employees' overtime is FLSA-required versus voluntarily paid.
Third, FS-2026-13 clarifies the overstatement vs understatement mechanics. If a W-2 overstates the Code TT amount, the employee is not entitled to deduct the overstated amount. If a W-2 understates or omits Code TT entirely, the employee has no deduction for the unreported amount absent a W-2c from the employer.
Fourth, FS-2026-13 adds guidance on the W-2c correction process specifically for Code TT, confirming that the W-2c is the correct mechanism for correcting both overstatements and understatements of qualified overtime in Box 12.
Fifth, FS-2026-13 confirms that Form 4852 (Substitute for Form W-2) cannot be used by employees to claim the Section 225 deduction for amounts not reported by the employer. Form 4852 is generally available as a substitute when an employer fails to issue a W-2. FS-2026-13 specifically closes this alternative for Section 225 purposes: the deduction requires the employer's W-2 or W-2c, full stop.
The Current Federal Tax Developments analysis describes Q&A-22 as representing a statutory-level bar: the deduction simply does not exist for amounts the employer failed to report. The IRS is not creating an administrative barrier; it is reading IRC Section 225 to require W-2 reporting as a condition of the deduction itself.
What Was the 2025 Transition Relief and Why Is It Gone in 2026?
IRC Section 225 was enacted by the OBBBA on July 4, 2025, effective for taxable years beginning after December 31, 2024. When the law was enacted, most employer payroll systems were not prepared to separately identify and code FLSA-required overtime in W-2 Box 12. The Form W-2 itself had not yet been updated to include Code TT (that update appeared in the January 9, 2026 W-2 instructions).
IRS Notice 2025-69, issued in November 2025, provided transition guidance for the 2025 tax year. The notice established seven alternative methods (Methods A through G) by which employees whose employers had not coded their overtime could reconstruct and self-report the qualified overtime amount on their 2025 individual tax returns. The methods ranged from using the employee's own pay records (Method A) to using payroll records obtained directly by the employee from the employer (Method G).
The transition relief was explicitly limited to the 2025 tax year. Notice 2025-69 stated that the alternative methods were available only for returns filed for tax year 2025. For tax year 2026 and forward, only the employer's W-2 Box 12 Code TT amount (or a corrected W-2c) would suffice.
FS-2026-13 is the IRS's formal confirmation that the transition period is over. As of January 1, 2026, employers must correctly code FLSA-required overtime in Box 12 Code TT on every affected employee's W-2. Employees who received qualifying overtime in 2026 and whose employers fail to code it correctly have no independent path to the deduction.
The New Employer Liability: Why Employees Cannot Deduct Overtime You Failed to Report
The shift from 2025 to 2026 is a shift in who bears the compliance risk. In 2025, a missed Code TT created an inconvenience for employees, who could use the alternative methods to reconstruct their deduction. The employee bore the documentation burden, and the employer's error was remediable at the individual level.
In 2026, a missed Code TT eliminates the employee's deduction entirely. The employee has no self-help remedy. The only correction mechanism is the employer's issuance of a Form W-2c. The employer's payroll error creates a direct financial harm to the affected employee: the permanently lost deduction.
The dollar magnitude of that harm: IRC Section 225 provides a deduction of up to $12,500 per individual ($25,000 on a joint return) for qualified overtime compensation, subject to MAGI phase-outs of $150,000 for single filers and $300,000 for joint filers per CPA Practice Advisor. An employee earning $6,000 in FLSA-required overtime in 2026 at the 22% federal income tax bracket would owe approximately $1,320 in additional federal income tax if the deduction is lost because the employer failed to code it correctly.
The W-2c obligation: when an employer's W-2 understates Code TT, the employer must issue a corrected Form W-2c reflecting the correct Box 12 Code TT amount. The employer files the W-2c with the Social Security Administration and provides a copy to the employee. The employee then files an amended return (Form 1040-X) to claim the corrected deduction.
The Mondaq/Liskow analysis specifically notes that employers who understated Code TT have an obligation to issue corrected W-2cs, and that the W-2c is the only mechanism through which affected employees can recover their deductions.
What Does "Any Amount Not Reported in Box 12 Code TT May Not Be Considered" Actually Mean for Your Workers?
The FS-2026-13 Q&A-22 bar operates at the individual amount level, not the employee level. An employee who received some correctly coded overtime and some uncoded overtime has a deduction for the coded amount only. The uncoded amount is lost absent a W-2c.
Concretely: an employee who earned $8,000 in FLSA-required overtime in 2026, of which the employer correctly coded $5,000 in Code TT and failed to code $3,000, has a deduction of $5,000. The $3,000 unreported amount is not deductible absent a W-2c. The employee cannot deduct $8,000 based on their own pay records; only the employer-coded $5,000 counts.
This per-amount rule has a specific implication for payroll systems that partially implemented Code TT coding: a system that correctly identified FLSA overtime for some pay periods but not others creates a fractional exposure. The employee has a deduction for the correctly coded periods and loses the deduction for the incorrectly coded or uncoded periods.
For employees whose employers coded no Code TT amount at all (a complete miss), the Section 225 deduction is entirely lost for 2026 absent a corrected W-2c. The employee's personal pay stubs, time records, or payroll records obtained independently do not substitute for the W-2 reporting requirement in 2026.
The employee's only path forward when the employer's W-2 is wrong: request a Form W-2c from the employer. Form 4852, available when an employer fails to issue any W-2, is explicitly excluded for Section 225 purposes per FS-2026-13.
What Is the FLSA Coverage Filter and Is Your Payroll System Applying It Correctly?
IRC Section 225 defines qualified overtime compensation as compensation for hours worked above the FLSA-required overtime threshold. The FLSA requires overtime pay at not less than 1.5 times the regular rate for hours worked above 40 in a workweek for covered, non-exempt employees. Only overtime that FLSA independently requires qualifies. Overtime paid voluntarily, overtime paid pursuant to state law exceeding FLSA requirements, and overtime paid under CBAs going beyond FLSA amounts do not qualify.
FS-2026-13 added new FLSA coverage detail:
Federal employees: covered by FLSA but under Title 5 of the US Code mechanics rather than the standard FLSA formula. Federal employees' FLSA-required overtime qualifies but the calculation must follow Title 5 rules.
State and local government employees: covered by FLSA but may have comp time arrangements under FLSA Section 7(o). Only cash overtime paid pursuant to FLSA obligations qualifies. Comp time does not qualify even if later cashed out.
White-collar exemptions: the FLSA's overtime requirements do not apply to employees qualifying for the executive, administrative, professional, computer, or outside sales exemptions. Overtime voluntarily paid to exempt employees does not qualify for Code TT regardless of amount.
The payroll system question: a system that captures all overtime paid to all employees, regardless of FLSA coverage, overstates Code TT for employees who received voluntary or state-law overtime above the FLSA threshold. A system that excludes FLSA-covered government employees because of comp time complexity may understate Code TT.
The practical audit question: can your payroll system produce a report by employee, by pay period, of Code TT amounts coded, identifying the FLSA coverage basis for each amount? If not, the FLSA filter may not be operating correctly.
Which Overtime Types Do NOT Qualify and Must Be Excluded From Code TT: State Law, CBA, and Voluntary OT
Three specific categories of overtime must be excluded from Code TT. Payroll systems that include these categories are overstating Code TT.
State-law overtime above the FLSA threshold. California, Nevada, and Alaska require overtime for hours worked above 8 in a day, which can produce state-law overtime obligations for hours within the 40-hour weekly FLSA threshold. An employee who works 45 hours in a California week with 1 hour of California daily overtime (hours 8 to 9 on a given day) and 5 hours of FLSA weekly overtime (hours 41 to 45 in the week) has FLSA-required overtime only for the 5 hours above 40. The California daily overtime is not FLSA-required and does not qualify for Code TT.
Collective bargaining agreement overtime above FLSA. A CBA may require time-and-a-half for hours above 35 per week or premium pay for weekend or holiday work. Only the portion that FLSA independently requires qualifies. The additional premium beyond FLSA's 40-hour threshold requirement does not qualify.
Voluntary overtime. Employers who pay overtime to FLSA-exempt employees, or who pay overtime premiums to non-exempt employees for hours below the 40-hour FLSA threshold, are paying voluntary overtime. That overtime does not qualify for Code TT regardless of amount.
What Is the W-2c Correction Process and What Triggers Your Obligation to Issue One?
A Form W-2c is a corrected Statement of Wages and Tax. Employers use it to correct errors on previously issued W-2s. The W-2c is filed with the Social Security Administration (Copy A) and provided to the employee (Copy B).
The obligation to issue a W-2c for Code TT arises when an employer determines that the Code TT amount on an issued W-2 is incorrect: understated, overstated, or omitted entirely.
For understatements discovered before January 31, 2027 (the W-2 issuance deadline for the 2026 tax year): the error can be corrected on the original 2026 W-2 rather than requiring a separate W-2c. This is the optimal correction path because it avoids the amended filing process.
For understatements discovered after the 2026 W-2s are issued in January 2027: a W-2c is required. The employee uses the W-2c to file an amended return (Form 1040-X) claiming the corrected deduction.
There is no specific statute of limitations on the obligation to issue a corrected W-2. The practical deadline is determined by the employee's ability to file an amended return within the three-year statute of limitations for refund claims from the original return due date.
Employer penalties for incorrect W-2s: under IRC Section 6721, employers face penalties for failing to file correct information returns. The penalty ranges from $50 to $630 per form (2026 indexed amounts) depending on when the correction is made. Intentional disregard carries a minimum penalty of $670 per form.
What Is the Dollar Risk: How to Calculate Your Exposure If Code TT Was Understated Since January 2026
The exposure calculation for a systematic Code TT understatement has three components: the number of affected employees, the understated overtime amount per employee, and the tax deduction value per dollar of understated overtime.
Step 1: identify affected employees. Pull a report of all employees who received FLSA-required overtime since January 1, 2026. Compare to employees for whom Code TT amounts were populated. The difference is the affected population.
Step 2: calculate the understated amount per employee. For each affected employee, compare the FLSA-required overtime actually received to the Code TT amount populated (or zero if none). The difference is the understated amount.
Step 3: calculate the tax deduction value. The Section 225 deduction reduces federal taxable income by the qualified overtime amount (up to $12,500 individual, $25,000 joint). The tax impact per dollar of lost deduction is the employee's marginal federal income tax rate.
A concrete example: a manufacturing employer with 1,000 non-exempt hourly workers who averaged $6,000 each in FLSA-required overtime in 2026, with no Code TT populated:
Total uncoded FLSA overtime: 1,000 employees x $6,000 = $6 million. Lost deductions at 22% bracket: $6 million x 22% = $1,320,000 in aggregate employee tax exposure. W-2c correction scope: 1,000 W-2c filings plus employee notification and amended return support.
For a 5,000-employee manufacturer: $30 million in uncoded overtime, approximately $6.6 million in aggregate employee tax exposure at the 22% bracket. Higher for employees in the 24% or 32% brackets.
The exposure compounds with every remaining pay period in 2026: a correction in August limits the W-2c scope to eight months of understatement. A correction in November limits it to eleven months. Every additional pay period of delay increases the correction scope and the W-2c filing volume.
What New FLSA Details Did FS-2026-13 Add That FS-2026-01 Did Not Cover?
Federal employees. FS-2026-01 was silent on federal employee overtime. FS-2026-13 confirms federal employees are eligible for the Section 225 deduction on FLSA-required overtime but specifies that the applicable overtime rules follow Title 5 of the US Code rather than the standard FLSA formula. Federal agencies and contractors with federal employee populations must apply Title 5's overtime calculation rules when determining which hours qualify.
State and local government employees and comp time. FS-2026-13 addressed the comp time alternative under FLSA Section 7(o). State and local government employees may receive compensatory time off instead of cash overtime under 7(o) arrangements. Only cash overtime paid pursuant to FLSA obligations qualifies for Code TT. Comp time provided in lieu of cash overtime does not qualify, even if later cashed out.
Mid-year FLSA exemption status changes. FS-2026-13 addressed what happens when an employee changes exemption status during the year. The deduction applies only to FLSA-required overtime earned during the period when the employee was non-exempt and FLSA-covered. The Code TT amount must reflect only the qualifying periods.
Regular rate clarification. FS-2026-13 confirmed that Code TT reflects the premium portion of overtime (the half-time additional pay above the regular rate) rather than the total overtime compensation. Employers whose regular rate calculations include non-discretionary bonuses, shift differentials, or other inclusions must ensure the Code TT amount reflects only the premium portion attributable to the correct regular rate.
What Should Your Payroll Team and Controller Audit Before December 31, 2026?
Six specific actions before December 31.
First, run a Code TT population audit by employee and pay period. For every pay period from January through the current date, identify which employees received overtime pay and whether Code TT was populated. Discrepancies between overtime paid and Code TT populated are the starting point for the correction analysis.
Second, confirm the FLSA coverage filter is correctly excluding state-law overtime, CBA overtime above the FLSA threshold, and voluntary overtime to exempt employees. Test the filter logic against known employees in each category.
Third, calculate the aggregate exposure using the three-step methodology above. This determines whether the correction is a minor technical fix or a significant remediation project warranting escalation to the CFO and external auditor.
Fourth, if the understatement is material, consult employment counsel and the external auditor before issuing corrected W-2cs. A systematic understatement may have implications beyond the tax correction, including potential wage and hour claims.
Fifth, correct the payroll system configuration before the next pay period. The goal is to stop accumulation of additional understatement before year-end. Every pay period of delay after this point increases the W-2c correction scope.
Sixth, update employee communications. Employees aware of the no tax on overtime deduction will ask HR whether their W-2 will correctly reflect Code TT. A proactive communication explaining the employer's Code TT coding process reduces the probability of employee complaints and IRS inquiries.
Frequently Asked Questions
What did IRS FS-2026-13 change about W-2 Box 12 Code TT reporting?
FS-2026-13, issued August 6, 2026, confirmed that the 2025 transition relief under Notice 2025-69 does not extend to tax year 2026. For 2026 and later years, employees may not self-report qualified overtime that their employer failed to code in Box 12 Code TT. Any amount not reported in Code TT may not be considered for purposes of the IRC Section 225 deduction. The employer's W-2 or a corrected W-2c is the only acceptable documentation.
Can employees still self-report qualified overtime using pay stubs in 2026?
No. Methods A through G under Notice 2025-69 were limited to the 2025 tax year. For 2026, employees must rely on their employer's W-2 Box 12 Code TT amount. Pay stubs, personal logs, and employer payroll records obtained independently do not substitute for the employer's W-2 coding.
What happens if an employer fails to report qualified overtime in Box 12 Code TT?
The employee loses the IRC Section 225 deduction for the unreported amount. The employee's only recourse is to request a corrected Form W-2c from the employer. Form 4852 cannot be used for Section 225 purposes per FS-2026-13.
What overtime qualifies for Code TT and does state-law overtime count?
Only FLSA-required overtime qualifies: hours above 40 in a workweek for non-exempt, FLSA-covered employees at not less than 1.5 times the regular rate. State-law overtime above FLSA thresholds (such as California daily overtime), CBA overtime above the FLSA threshold, and voluntary overtime to exempt employees do not qualify.
What is the maximum qualified overtime deduction in 2026?
Up to $12,500 per individual ($25,000 on a joint return), subject to MAGI phase-outs beginning at $150,000 single / $300,000 joint. Available for tax years 2025 through 2028 under the OBBBA.
Can an employee file Form 4852 instead of a corrected W-2 for overtime deductions?
No. FS-2026-13 explicitly excludes Form 4852 as a substitute for Section 225 purposes. The employer's W-2 or a corrected W-2c is the only acceptable documentation.
When does the no tax on overtime deduction expire?
IRC Section 225 is effective for taxable years beginning after December 31, 2024 and before January 1, 2029. The deduction is available for tax years 2025, 2026, 2027, and 2028 unless extended by Congress.
Key Takeaways
- IRS Fact Sheet FS-2026-13, issued August 6, 2026, confirms the 2025 transition relief for W-2 Box 12 Code TT is over. For 2026 and forward, employees cannot self-report qualified overtime their employer failed to code. FS-2026-13 supersedes FS-2026-01.
- Q&A-22 is categorical: any amount not reported in Box 12 Code TT may not be considered for the IRC Section 225 deduction. Employees lose the deduction for unreported amounts absent a corrected W-2c from the employer.
- Form 4852 cannot be used for Section 225 purposes. The employer's W-2 or a corrected W-2c is the only acceptable documentation.
- Only FLSA-required overtime qualifies: hours above 40 in a workweek for non-exempt, covered employees. State-law overtime above FLSA thresholds, CBA overtime above FLSA, and voluntary overtime to exempt employees do not qualify. Payroll systems must implement the FLSA coverage filter at the hour level.
- FS-2026-13 added new FLSA coverage detail not in FS-2026-01: federal employee overtime follows Title 5 mechanics, state and local government comp time does not qualify, mid-year exemption status changes affect the qualifying period, and Code TT reflects the premium portion only.
- Dollar exposure calculation: affected employees multiplied by understated FLSA overtime per employee multiplied by marginal tax rate. For a 5,000-employee manufacturer with $6,000 per worker uncoded, aggregate employee tax exposure is approximately $6.6 million at the 22% bracket.
- Corrections discovered before January 31, 2027 can be made on the original 2026 W-2. Corrections discovered after that date require W-2c filings. IRC Section 6721 penalties apply to late corrections: $50 to $630 per form, or a minimum of $670 for intentional disregard.
- Every additional pay period without a payroll system correction increases the W-2c scope. Audit and correct now.
