IRS Updates OT Deduction Guidance

In Fact Sheet 2026-13, the Internal Revenue Service (IRS) updated its rules for the new overtime (OT) pay tax deduction. The updates are particularly focused on employer obligations regarding the deduction. The updated guidance is in the form of frequently-asked questions (FAQs). Generally, the updates include:

• Information on the requirement that qualified overtime compensation must be separately reported on Form W-2
• Adds clarifications to the rules on federal income tax withholding on OT compensation
• Provides details on the information to be reported on Forms W-2, 1099-MISC and 1099-NEC
• Clarifies the limits and timing of the qualified OT deduction

The FAQs also clean up the guidance by updating its index and numbering and eliminating guidance that was applicable only to tax year 2025.

Prospects: This guidance is aimed at minimizing confusion over how the OT deduction works, for both employers and workers. There is concern that the new deduction is complex and somewhat tricky, potentially leading to potential fraud as well as purposeful or inadvertent errors.

NAIFA Staff Contact: Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org