IRS gives more guidance on the OBBBA overtime tax break

On August 6, the Internal Revenue Service (IRS) posted updated frequently asked questions (FAQs) on the new deduction for qualified overtime compensation under the One Big Beautiful Bill Act (OBBBA). The new FAQs supersede earlier FAQs that the IRS posted on January 23, 2026.

The new IRS document:

• Deletes information that applied only to the 2025 taxable year.
• Provides clarification of the limits and timing of the qualified overtime compensation deduction.
• Provides additional information on coverage and exemptions under the Fair Labor Standards Act (FLSA).
• Provides detailed information on Form W-2, Form 1099-MISC, and Form 1099-NEC requirements applicable to employers and payors of qualified overtime compensation.
• Adds information on federal income tax withholding procedures related to qualified overtime compensation.
• Adds information on the requirement that qualified overtime compensation must be separately reported on Form W-2 to claim the deduction, making accurate overtime calculations and information reporting more important.
• Provides more detailed information on issues applicable to federal employees.

Some added updated information includes the following:

• The only circumstance where someone would report qualified overtime compensation on a Form 1099-MISC or Form 1099-NEC instead of a Form W-2 is when the worker is an employee of the employer for FLSA purposes but treated as an independent contractor for purposes of the Internal Revenue Code.
• Employers don’t have to reduce wages subject to income tax withholding to account for the qualified overtime compensation deduction. Employers may not reduce withholding on wages to account for the qualified overtime deduction unless the employee gives the employer an updated and valid Form W-4 accounting for the employee’s expected deduction for qualified overtime compensation.
• Employers must report the amount of qualified overtime compensation paid to an employee beginning in 2026, on Form W-2 in box 12, using code TT.
• If an employer discovers an error on Form W-2, box 12, code TT, it must file Form W-2c, Corrected Wage and Tax Statements, with the Social Security Administration and give Form W-2c to the employee as soon as possible.

The new FAQs move from the temporary 2025 reporting relief period to more specific compliance for tax years 2026 through 2028.

Key to remember: Employers with employees taking advantage of the overtime tax break can refer to the updated IRS FAQs.