When did the IRS approximation rule for qualified overtime end?

IRS transition relief under Notice 2025-69 allowed employers and employees to use reasonable estimation methods for qualified overtime during tax year 2025. That relief ended on December 31, 2025. Starting with the 2026 tax year, employers must report qualified overtime precisely on Form W-2 using Box 12, Code TT.

What is W-2 Box 12 Code TT?

Box 12, Code TT is a new W-2 reporting code finalized by the IRS for tax year 2026 and beyond. Employers must use it to report the total amount of qualified overtime compensation paid to each employee — the FLSA overtime premium (the 0.5x portion above the regular rate), calculated to federal standards.

What is qualified overtime compensation under Public Law 119-21?

Under Public Law 119-21 (OBBBA), qualified overtime compensation is the overtime premium portion of time-and-a-half pay — the extra "half" above an employee's FLSA regular rate. FLSA-eligible employees may deduct up to $12,500 per year for tax years 2025 through 2028. It is not the same as total OT dollars shown in most payroll systems.

Why is qualified overtime difficult to calculate for public sector employers?

Qualified overtime requires isolating only the FLSA premium after computing a weighted average regular rate when employees earn multiple pay rates in a workweek (shift differentials, certification pay, longevity stipends). Most legacy ERP and payroll systems were not built for this — especially across 28-day FLSA Section 207(k) work periods used by police and fire departments.

What are the penalties for incorrect W-2 reporting of qualified overtime?

Incorrect W-2 statements may trigger IRS penalties under Code 6721 (failure to file correct information returns) and Code 6722 (failure to furnish correct payee statements). Penalties range from $60 to $680 per incorrect form. For a mid-sized public employer with hundreds of overtime-eligible employees, exposure adds up quickly.

Do employers need to replace their ERP to comply with Code TT reporting?

No. Compliance does not require replacing your ERP or waiting for a vendor patch. Purpose-built compliance overlays can sit on top of existing payroll infrastructure, perform FLSA-weighted premium calculations (including Section 207(k) cycles), and produce the per-employee qualified overtime totals required for W-2 Box 12, Code TT.

The 2025 Approximation Rule Ends on December 31. Here Is What That Means for Finance and HR Directors.

IRS transition relief for estimating qualified overtime ended December 31, 2025. Starting tax year 2026, employers must report FLSA-calculated qualified overtime on W-2 Box 12 Code TT.

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