For employers and payroll staff, 2026 is the year the new deductions became a reporting duty. The transition relief of 2025 has ended.
What goes on the W-2
For each employee with qualified amounts, report the qualified overtime compensation in Box 12, code TT: FLSA overtime hours (hours over 40 in the workweek) multiplied by one half of the FLSA regular rate, as the IRS sets out in FS-2026-13. Report qualified tips in Box 12, code TP, and the employee’s Treasury Tipped Occupation Code in Box 14b. Qualified tips also continue to appear in box 7 as before.
The number employees can deduct is not your number
Your code TT total is the gross qualified premium. The employee then applies the $12,500 cap and the income phase-out on Schedule 1-A, so a correct W-2 will often be higher than the deduction the employee ends up claiming. That gap is expected, and worth explaining before January phone calls start.
Errors: correct them with Form W-2c
Employers must correct incorrect W-2 information with Form W-2c as soon as possible after discovering an error. This matters more than usual here, because from 2026 an employee cannot claim overtime premium that is not reported: an uncorrected understatement is a real loss to the employee, not a paperwork detail. Incorrect information returns can also draw penalties under sections 6721 and 6722.
The rare 1099 cases
Qualified overtime paid to a nonemployee is reported on Form 1099-NEC box 1d, and on Form 1099-MISC box 14; qualified tips to a nonemployee on 1099-NEC box 1c and 1099-MISC box 13. Most employers will never use these boxes, but staffing and platform arrangements sometimes land there.
Car loan and 1099 thresholds, briefly
Lenders receiving $600 or more of specified passenger vehicle loan interest must report it on the new Form 1098-VLI, Vehicle Loan Interest Statement (section 6050AA), and payers should note the raised 1099-NEC and 1099-MISC threshold of $2,000 for payments made in 2026, covered in the threshold guide.