The Overtime Equation Under OBBBA

Key Takeaways 

• “No tax on overtime” is an employee income tax deduction for the FLSA premium portion of overtime only, not the full overtime check. 
• 2025 transition relief has ended. For 2026 through 2028, employers must separately report qualified overtime on Form W-2, Box 12, Code TT. 
• Employees can generally deduct only what their employer reports, so payroll accuracy directly affects your workforce. 
• Police and fire work periods, comp time, and contract-based overtime each need careful treatment. 

The Overtime Equation: What Ohio Government Employers Need to Know About “No Tax on Overtime” in 2026 

The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, created a new federal deduction for qualified overtime. For Ohio governments with large hourly workforces, the headline was simple. The details are not as straightforward, particularly for police and fire personnel. 

With IRS Fact Sheet FS-2026-13 released August 6, 2026, superseding the January FAQs, the responsibility now sits squarely with employers. 

What the Deduction Is (and Isn’t) 

The deduction lives in new Internal Revenue Code Section 225. Here’s how it works: 

• It’s an employee deduction, not an exemption. Overtime is still wages, and FICA, Medicare, and withholding still apply. 
• Only overtime required under Section 7 of the FLSA qualifies, and only the premium “half” of time and a half. If an employee earns $20 an hour and $30 for overtime, only the $10 premium qualifies. 
• The maximum deduction is $12,500 for single filers and $25,000 for joint filers. It phases out starting at $150,000/$300,000 of modified AGI. 
• It’s temporary, covering tax years 2025 through 2028. 
• Employees claim it on Schedule 1-A of their Form 1040, not through payroll. 

What Changed for 2026 

For 2025, employers weren’t required to separately report qualified overtime. For 2026 through 2028, that relief is over: 

• Qualified overtime must be reported in Form W-2, Box 12, Code TT. Report the full premium, even if it exceeds the employee’s deduction cap. 
• Employees may generally deduct only what’s reported. If the amount is understated, they need a corrected W-2c. 
• Information return penalties apply again, ranging from $60 to $660 per form. 
• Withholding doesn’t change unless an employee submits an updated W-4. Setting expectations early can head off a lot of “why didn’t my check change?” questions. 

If your payroll system wasn’t tracking the FLSA premium starting January 1, 2026, now is the time to close that gap. 

The Core Calculation 

Qualified overtime is calculated one workweek at a time: FLSA hours over 40 × ½ × FLSA regular rate. Hours can’t be averaged across weeks, and leave doesn’t count as hours worked. 

Police and fire work periods. Under FLSA Section 207(k), public safety employees may be paid on work periods of 7 to 28 days. For a 14-day period, the threshold is 106 hours for fire protection and 86 for law enforcement. If your city pays overtime earlier, say after 96 hours, the hours between 96 and 106 are generous local pay. They are reportable as overtime but not deductible. 

Comp time. Comp time banked at 1.5× qualifies only when it’s cashed out. One third of the payout is the qualified premium. Comp time used as paid leave doesn’t qualify. 

Contracts and premiums. Daily overtime under a collective bargaining agreement only qualifies if weekly hours worked also exceed 40. With double time, only the FLSA half time premium qualifies. Shift differentials and nondiscretionary bonuses raise the regular rate, so recalculate it in the periods they apply. 

Your payroll vendor. Your vendor may configure Code TT, but the reporting duty and penalty exposure stay with you. Get vendor readiness confirmed in writing. 

What About Ohio Income Tax? 

Ohio’s income tax starts from federal adjusted gross income. The overtime deduction is taken below AGI, so it doesn’t reduce Ohio AGI or affect the state’s revenue base. Ohio municipal and school district income taxes aren’t built from federal taxable income either, but it’s worth watching for any conformity updates. 

Action Steps 

1. Identify FLSA-covered, nonexempt employees and separate the FLSA premium from CBA, holiday, and other premiums in your pay codes. 
2. Configure payroll to compute the workweek premium and track comp time payouts. 
3. Build reporting controls, including pre-filing spot checks. 
4. Train payroll and HR staff and communicate with employees. 
5. Document FLSA determinations, calculations, and vendor correspondence to support a reasonable-cause defense. 
6. Monitor IRS and DOL guidance as it evolves. 

Need help working through your payroll scenarios? Rea’s Government Services team helps Ohio governments with police and fire wages, comp time, payroll configuration, and documentation. Connect with an advisor. 

This article is for educational purposes and reflects law and IRS guidance as of 10/14/2026. Guidance is subject to change. 

About the Author 

Kaitlyn Cook Robison, CPA, CFE, MPPA, is a Principal and Rea’s Practice Leader of Tax, based in Cleveland. She helps public and private sector clients navigate new tax rules with practical, workable solutions. Reach Kaitlyn at Kaitlyn.Robison@reaadvisory.com.