There are about 10 weeks left in 2026, and this year-end comes with something new: for the first time, the Form W-2 has a place to report overtime. Box 12, code TT, now shows each employee’s “qualified overtime compensation,” the amount they can use for the new federal overtime deduction.
Here’s why that matters to construction, trucking and hauling businesses: according to the IRS, employees can only deduct the overtime their employer reports in Box 12 with code TT. If your payroll isn’t tracking the right number, your crew loses a deduction of up to $12,500 per person, and you’ll be the one fixing W-2s in February.
The good news is that there’s still time to get it right. Here’s what changed, where trades businesses get tripped up, and a week-by-week checklist to finish the year clean.
What changed on the 2026 W-2
The new law created a federal income tax deduction for qualified overtime pay, available for tax years 2025 through 2028. For 2025, employers weren’t required to report it separately. Starting with 2026 wages, they are. The key points from the IRS:
- Where it goes: Form W-2, Box 12, code TT.
- How much employees can deduct: up to $12,500 per return, or $25,000 on a joint return. The deduction phases out above $150,000 of modified adjusted gross income ($300,000 joint).
- What it doesn’t change: it’s an income tax deduction only. Overtime is still subject to Social Security, Medicare and unemployment taxes, so your payroll tax calculations stay the same.
- Report the full amount: employers report all qualified overtime paid, even if an employee’s deduction ends up limited.
- Mistakes mean W-2c’s: errors have to be fixed with corrected W-2s, and an employee can’t substitute their own estimate.
What “qualified overtime” actually means (and doesn’t)
This is where most payroll setups will get it wrong. Qualified overtime is not the employee’s total overtime pay. It’s only the premium portion that federal wage law (the Fair Labor Standards Act, or FLSA) requires. For time-and-a-half, that’s the “half.”
Example: a laborer earns $30 an hour and works 50 hours in a week. Their overtime pay for the 10 extra hours is $450 (10 × $45). The qualified overtime is only $150 (10 × the $15 premium). Over 50 weeks with 10 overtime hours each, that’s $7,500 in Box 12, not $22,500.
A few more rules that catch businesses off guard:
- Only FLSA-required overtime counts. If you pay double time, or overtime under a union agreement or company policy, only the amount the FLSA requires qualifies. The extra is still taxable as usual.
- Exempt employees don’t qualify at all. Salaried managers and other FLSA-exempt staff have no qualified overtime, even if you pay them extra hours.
- Owners usually don’t qualify. An employee who owns at least 20% of the business and actively manages it is generally treated as exempt. That includes many S corp owner-operators.
The trucking twist: many drivers’ overtime doesn’t qualify
If you run trucks, slow down here. Under the FLSA’s Motor Carrier Act exemption, drivers, driver’s helpers, loaders and mechanics who work for carriers regulated by the U.S. Department of Transportation are generally exempt from federal overtime, as long as their work affects the safety of vehicles over 10,000 pounds in interstate commerce.
That means overtime you pay those drivers, whether by policy or to stay competitive, is generally not qualified overtime and shouldn’t go in Box 12 with code TT. Drivers of lighter vehicles, local yard staff and construction laborers may be a different story. Whether the exemption applies depends on the vehicles, the routes and the freight, so each role needs a real look, not a guess.
Getting this wrong cuts both ways. Report too much and your drivers claim deductions they aren’t entitled to; report too little and your laborers miss out. Either way, you’re issuing corrections.
Your 10-week year-end checklist
Weeks 1–2 (Oct 20 – Nov 2): Classify every employee
- List every W-2 employee as FLSA non-exempt or exempt.
- Flag drivers, helpers, loaders and mechanics who may fall under the Motor Carrier Act exemption.
- Flag owners with 20% or more ownership who work in the business.
Weeks 3–4 (Nov 3 – 16): Split your payroll codes
- Set up separate earnings codes for regular pay, the FLSA-required overtime premium, and any extra overtime beyond what the FLSA requires.
- Pull 2026 year-to-date payroll and time records, and calculate the qualified premium for each non-exempt employee so far.
Weeks 5–6 (Nov 17 – 30): Confirm with your payroll provider
- Confirm your payroll system will populate Box 12, code TT, and how it calculates the amount.
- Reconcile its year-to-date totals against your own calculation.
- Let employees know what to expect. Those who want less tax withheld can update their Form W-4 (Step 4(b)) to account for the deduction.
Weeks 7–8 (Dec 1 – 14): Make your year-end business moves
- Equipment: 100% bonus depreciation is back, and the 2026 Section 179 limit is $2.56 million (phasing out above $4.09 million of purchases). But the asset has to be placed in service by December 31, meaning ready and available for use, not just ordered or paid for.
- Contractors: the 1099-NEC threshold rises to $2,000 for 2026 payments. Collect W-9s now from every contractor you’ve paid $2,000 or more.
- S corp owners: check that your own W-2 salary is reasonable before your final payroll run. Our free Reasonable Salary Calculator gives you a defensible number for your state.
Weeks 9–10 (Dec 15 – 31): Close it out
- Review the final payroll run, and reconcile code TT totals to your payroll registers for every employee.
- Close the books for the year so January is about filing, not fixing.
January 2027: Deadlines to mark now
- January 15, 2027: fourth-quarter estimated tax payment.
- February 1, 2027: W-2s and 1099-NECs due to workers and the government (January 31 falls on a Sunday).
Frequently asked questions
Does the overtime deduction lower my payroll taxes as an employer?
No. It’s a federal income tax deduction for the employee. Overtime is still subject to Social Security, Medicare and unemployment taxes.
We pay double time on Sundays. Does all of it count?
No. Only the premium the FLSA requires counts, which is the extra half for hours over 40 in a workweek. Anything above that is regular taxable pay.
Do our owner-operators paid on a 1099 get anything?
Generally no. Independent contractors aren’t covered by FLSA overtime, so there’s normally nothing to report. The IRS notes a rare exception for workers who are employees under the FLSA but contractors for tax purposes; those amounts go in Box 1d of Form 1099-NEC.
We’ve already run most of 2026 payroll without separate codes. Is it too late?
No. As long as you have time records, the qualified premium can be calculated for the year before W-2s go out. It’s much easier to do in November than in late January.
Can employees claim the deduction if it’s not on their W-2?
For 2026, the IRS says employees can only deduct the amount reported in Box 12 with code TT, and they can’t substitute their own estimate. If it’s missing or wrong, the fix is a corrected W-2 (Form W-2c).
Get year-end right the first time
E-Accounting Solutions works every day with construction, trucking, hauling and field service businesses, where overtime, job costing and payroll classification get complicated fast. We can review your employee classifications, check your payroll setup for code TT, and line up your year-end equipment and tax moves, all before December 31.
Schedule a free consultation, or try our free tools, including the 1099 Compliance Check for haulers.
This article is general information, not tax or legal advice for your specific situation. Overtime classification depends on the facts of each role.
Sources
- IRS Fact Sheet 2026-13: Questions and answers about the deduction for qualified overtime compensation
- IRS: Questions and answers about the new deduction for qualified overtime compensation
- IRS: Instructions for Forms 1099-MISC and 1099-NEC
- U.S. Department of Labor Fact Sheet #19: The Motor Carrier Exemption under the FLSA
- 2026 inflation adjustments under Revenue Procedure 2025-32
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