Peak-Season Overtime Now Needs Its Own W-2 Code. Set Up Code TT Before the Holiday Hours Start

If your brand runs its own warehouse, fulfillment line, or support desk, the next four months are when your hourly staff work the most overtime. This year that overtime has a reporting requirement attached, and the IRS has now spelled it out.

Fact Sheet FS-2026-13, dated August 6, 2026, updates the questions and answers on the deduction for qualified overtime compensation and supersedes the January version. The employer sections are the useful part. For tax year 2026 you must report each employee's qualified overtime compensation on Form W-2 in box 12, using code TT. Employees generally can claim the deduction only on amounts you report. If your payroll system cannot produce that number by workweek, August is the month to fix it.

What goes in the box

Qualified overtime compensation is narrower than "overtime pay." Per the fact sheet, it is the overtime compensation required under section 7 of the Fair Labor Standards Act that exceeds the employee's regular rate. The formula the IRS gives for most employees is FLSA hours over 40 in a workweek, times one-half, times the employee's FLSA regular rate of pay. In plain terms, only the "half" in time-and-a-half is qualified.

Three consequences matter for a warehouse payroll:

• Overtime you pay that the FLSA does not require does not count. Daily overtime under a state law, weekend or holiday premiums, and double time beyond what the FLSA requires are excluded. The fact sheet's example: an employee paid double time for ten overtime hours at a $20 regular rate has $100 of qualified overtime, the amount the FLSA required, not the $200 premium actually paid.
• The regular rate is the FLSA regular rate, which includes most non-discretionary pay. Peak-season attendance bonuses, shift differentials, and production incentives generally raise the regular rate, which raises the qualified half. If your system computes overtime off the base hourly rate and true-ups bonuses later, the code TT figure has to reflect the true-up.
• Employees who are exempt from FLSA overtime, and owner-employees with a bona fide 20 percent or greater equity interest who are active in management, have no qualified overtime regardless of what you pay them.

You report the full qualified amount even when the employee cannot deduct all of it. The IRS example is an employee with $30,000 of qualified overtime: the W-2 shows $30,000 in box 12, code TT, even though the deduction is capped at $12,500 per return, or $25,000 on a joint return, and phases out above $150,000 or $300,000 of modified adjusted gross income.

Withholding does not change on its own

The deduction does not make overtime exempt from income tax withholding, Social Security, Medicare, or federal unemployment tax. The fact sheet says an employer may not reduce withholding to account for the deduction unless the employee furnishes a new Form W-4 reflecting it; the 2026 W-4 has a place for it in step 4(b). Expect questions from staff who heard "no tax on overtime." The accurate answer is that their paycheck does not change, their W-2 will carry the new code, and the deduction is claimed on their return.

Errors must be corrected

If box 12, code TT is wrong, the fact sheet says you must file Form W-2c and furnish the corrected form, and that incorrect forms can draw information-reporting penalties under sections 6721 and 6722, with reduced penalties for timely corrections. Rather than fixing hundreds of W-2s in February, test the calculation on a few peak-season pay periods now.

A setup checklist for Q4

1. Ask your payroll provider exactly how it will populate code TT and whether it separates the FLSA premium half from the straight-time portion of overtime hours.
2. Confirm how non-discretionary bonuses and differentials flow into the regular rate and into the qualified amount, including retroactive true-ups.
3. If you operate in a state with daily overtime or other premiums beyond the FLSA, confirm the system computes the federal-required portion separately.
4. Review FLSA classifications for leads, supervisors, and anyone paid a salary but working peak hours; misclassification now has a W-2 consequence.
5. Run a parallel calculation on one August or September payroll and compare it to the provider's code TT output.
6. Decide what you will tell staff and seasonal hires about the deduction and the W-4, and keep it factual.

What this does not cover

Temporary workers supplied by a staffing agency are on the agency's payroll, and their reporting is the agency's job; your 3PL's employees are the same. The fact sheet notes that reporting on Form 1099-NEC or 1099-MISC is rare and applies only where someone is an employee for FLSA purposes but treated as a contractor for tax purposes. Federal employees and certain industries have their own rules. And the FAQs themselves say they may be updated and are not authority for resolving a case, so keep the version you relied on.

Payroll configuration sits with your provider, but the labor-cost and tax picture for peak season belongs in your year-end plan. If you want the overtime build, bonus structure, and reporting exposure reviewed as part of Q4 tax planning, our team works through these questions with owners every fall.