Qualified Overtime Compensation
Tax Glossary Term
Definition
Qualified overtime compensation is overtime pay that meets the requirements for the IRC Section 225 above-the-line deduction created by the OBBBA. To qualify, the overtime must be required under the Fair Labor Standards Act (FLSA) or an equivalent state law, meaning the employee must be a non-exempt, hourly or eligible salaried worker. Salaried-exempt employees, independent contractors, and self-employed individuals do not qualify. Only the premium portion of overtime is deductible — for time-and-a-half, only the 0.5x premium above the regular rate qualifies; for double-time, the 1.0x premium qualifies. The deduction is capped at $12,500 for single and head-of-household filers, or $25,000 for married filing jointly. Married filing separately filers are ineligible. The deduction phases out at 10.0% of MAGI above $150,000 (single/HoH) or $300,000 (MFJ). Employers report the qualified amount using W-2 Box 12 Code TT, mandatory from TY 2026. The amount flows to Schedule 1-A, Part II. FICA taxes still apply to all overtime wages; the deduction applies only to federal income tax. The provision is effective for tax years 2025 through 2028.
Example
Non-exempt employee, regular rate: $25/hr
300 overtime hours at time-and-a-half ($37.50/hr)
Total overtime pay: $37.50 × 300 = $11,250
Premium portion: $12.50 × 300 = $3,750
W-2 Code TT: $3,750
Cap (single): $12,500
$3,750 is under the cap, so full amount is deductible
Schedule 1-A, Part II deduction: $3,750