What is qualified overtime compensation? The overtime premium, explained

Short answer: qualified overtime compensation is the part of your overtime pay that the federal Fair Labor Standards Act (FLSA) requires above your regular rate: the "half" in time and a half, not the whole overtime check. Only employees who are covered by the FLSA and not exempt from its overtime rules have it. For 2026 your employer reports it in Form W-2 box 12, code TT, and you can deduct it on your federal return, up to $12,500 ($25,000 on a joint return), reduced once your modified adjusted gross income passes $150,000 ($300,000 joint) (IRS FS-2026-13 Q1, Q2, Q10, Q16).

Checked on 2 November 2026 against IRS FS-2026-13 (August 2026), questions 1 to 31.

In one line (FS-2026-13 Q12): for each workweek, hours over 40 × ½ × your FLSA regular rate = qualified overtime compensation for that week. A workweek is a fixed, recurring 168 hours set by the employer, and hours are never averaged across weeks (Q13).

Overtime premium vs total overtime pay

The FLSA requires at least time and a half for hours over 40 in a workweek. That pay has two parts: the straight-time "1" (your ordinary rate for the extra hours) and the "half" on top. Only the half is qualified. The IRS defines it as "the amount of overtime compensation required under 29 USC § 207 that is in excess of the employee's regular rate" (Q10).

Example: $24 an hour, 46 hours in one workweek. The 6 overtime hours pay 6 × $36 = $216. Qualified: 6 × $12 = $72. The other $144 is ordinary pay. The deduction doesn't make overtime tax-free either: it's still wages for Social Security and income tax withholding (Q1), and your employer withholds as usual unless you file a new Form W-4 (Q8, Q9).

Who has qualified overtime compensation

Only an FLSA overtime-eligible employee: someone covered by the FLSA and not exempt from its overtime requirement. If you're not, none of your overtime is qualified, "regardless of other laws or circumstances (such as a collective bargaining agreement)" (Q4). Common overtime exemptions the IRS lists (Q4), each with its own conditions:

Executive, administrative and professional employees, including teachers and academic administrative staff in elementary and secondary schools.
Outside sales employees, and employees in certain computer-related occupations.
Certain commissioned employees of retail or service establishments.
Employees of railroads and air carriers, taxi drivers, certain employees of motor carriers, seamen on American vessels, and local delivery employees paid on approved trip-rate plans.
Employees of certain seasonal amusement or recreational establishments, and certain agricultural employees.
Owners: an employee with a bona fide equity stake of at least 20% who actively manages the business counts as an exempt executive (Q5).

Each exemption has exact conditions, and the IRS tells employers to check them before applying one (Q4); ask payroll how you're classified. Federal employees can look it up: block 35 of the SF-50, "FLSA Category", says N (nonexempt, overtime-eligible) or E (exempt) (Q26).

What counts, and what doesn't

Pay	Qualified?	IRS FS-2026-13
The half-time premium for FLSA hours over 40	Yes	Q10, Q12
Straight-time pay for those overtime hours	No	Q16
The extra half of double time	No: only the FLSA minimum counts (double time)	Q16
Premiums for hours over 8 in a day, over 35 a week, or weekends and holidays, in a week that stays at 40 hours or less	No	Q16
Overtime paid under a state law or a union contract	Only up to what the FLSA itself requires (state daily overtime)	Q16
Any overtime paid to an exempt employee	No (exempt employees and owners)	Q4, Q5
Promised (nondiscretionary) bonuses, commissions, piece rates and shift differentials	Not by themselves, but they go into the regular rate, which makes the half bigger (bonuses, piece rate)	Q15
Hospital 8/80 or police and fire 7(k) schedules	Yes: the premium actually paid under that method (details)	Q17
State or local government comp time	Yes, when the time is used or paid out, not when it's earned (comp time)	Q18
Federal comp time (5 USC 5543)	Only the half portion of unused hours when they are paid out	Q27

The regular rate is all pay for employment in the workweek, "whether determined on a piece-rate, salary, commission, or some other basis", divided by the hours actually worked, minus the payments the FLSA excludes (Q15). The calculator page lists what's in and out.

Worked examples

Night-shift differential. $20 an hour for 44 hours ($880) plus a $2 night differential on 20 of them ($40). Regular rate: $920 ÷ 44 = $20.909. Qualified: ½ × $20.909 × 4 = $41.82, not the $40 you'd get from the base rate alone.
Piece rate. $1,100 of piece-rate earnings for a 50-hour week. Regular rate: $22. Qualified: ½ × $22 × 10 = $110.
Two jobs. A single filer has code TT of $8,000 from one employer and $6,000 from another: $14,000 in total. The limit is $12,500 per return (Q2), so the deduction is $12,500 before any income reduction.
State or local government comp time. Comp time accrues at 1.5 hours per overtime hour; 12 hours accrued in 2025 are used as days off in 2026. The IRS formula is the hours used × the rate the FLSA sets for that payment ÷ 3 (Q18). At $30 an hour that's 12 × $30 ÷ 3 = $120, qualified in 2026, the year it's paid. (Check: 12 comp hours are 8 overtime hours, and ½ × $30 × 8 = $120.)

The examples are our arithmetic on the IRS rules, with made-up pay. Work out your own week with the calculator.

Federal employees

Most federal employees fall under the Office of Personnel Management's FLSA rules, which differ from the private-sector ones (Q26-Q30). Employees of the Library of Congress, USPS, the Postal Regulatory Commission and the Tennessee Valley Authority follow the Department of Labor's rules instead (Q26).

Overtime thresholds: for most employees, 8 hours a day and 40 hours a week (Q28). GS-0081 firefighters covered by 5 USC 5545b work a biweekly period with a 106-hour threshold (Q29).
What's qualified: FLSA overtime pay is the straight-time rate × overtime hours, plus ½ × the hourly regular rate × overtime hours. Only the second part, the one-half portion, is qualified (Q30). Example: an hourly regular rate of $34 and 6 FLSA overtime hours give ½ × $34 × 6 = $102 qualified.
Hours of work: paid leave, paid holidays and comp time used count as hours of work under OPM's rules; hours for which comp time is earned do not (Q28).
Comp time: comp hours earned or used aren't qualified. When unused hours are paid out (after 26 pay periods, on transfer to another agency or on leaving federal service), the one-half portion of that payment is (Q27).
Questions about your own numbers go to your agency's HR or payroll office (Q30).

Where it shows up, and how you use it

Your W-2: box 12, code TT, the full amount paid in 2026, even above the deduction limit (Q6, Q10). In the rare case that you're an FLSA employee but paid as a contractor, it's in Form 1099-NEC box 1d or 1099-MISC box 14 (Q6, Q7).
Only what's reported counts. For 2026 onward you can use only the amount on your W-2 (Q20). Missing or too low? Ask for a corrected Form W-2c; Form 4852 doesn't count (Q22, Q23). Too high? Use only what you were actually paid (Q21).
The year it's paid: overtime counts in the year it is paid, under the rules for wage withholding (Q3).
To claim it you need a Social Security number valid for employment, issued before your return's due date (Q24); if you're married, a joint return (Q25). It works whether you itemize or take the standard deduction (Q1). Step by step: how to claim the overtime deduction.
Years: 2025 (rules in Notice 2025-69) and 2026 to 2028 (Q19). Residents of US territories can claim it only on overtime included in their US gross income (Q31).

Work out your deduction: no tax on overtime calculator.

This page covers the federal deduction only. Whether a state follows it is a state question, and we haven't checked any state's rules. Not tax or legal advice.

Working out code TT for a whole payroll, or for clients? The W-2 Code TT Kit runs every employee offline in one file, with CSV templates, the week-by-week audit trail and a guide to every rule and edge case on this page.

Get the kit ($29, accountants $99)

Sources

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