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Training Tidbit: Updated Setup for Overtime Pay Codes for 2026

As you may be aware, with the One Big Beautiful Bill Act (OBBBA), employees with qualified overtime compensation (for overtime paid after 40 hours in a week) are able to deduct the amount of pay exceeding their regular rate of pay (deduct the “half” of the “time-and-a-half” rate) starting with tax year 2025.

Since the IRS did not change the 2025 W2s, the Estimated Qualified Overtime Compensation Report was added in Payroll to provide employees with an estimated amount for 2025 (click here to refer to the appropriate Training Tidbit).  Then starting with tax year 2026, qualified overtime compensation will be reported in Box 12TT on the W2.

What’s Changing for 2026

We had previously provided guidance for setting up overtime pay codes to ensure the qualified overtime compensation would be able to post properly on the 2026 W2s.  Since then, we have received feedback and questions highlighting many real-world overtime calculation scenarios – particularly for employees paid using multiple jobs, blended rates, flat amounts, contracts or per-route pay to name a few.

Based on feedback and various scenarios for which organizations are calculating overtime, we are adjusting how the School Accounting System will report qualified overtime compensation on the 2026 W2s to offer more flexibility.

In a recent update:

  • Box 12TT was added as an option in the Federal Form Box ID field for pay codes.
  • Overtime Rate Method field was added to specify the overtime rate method used:
    –  One and One-Half Rate:  if the overtime rate is equal to one and one-half of the regular rate.
    –  Premium (Half) Rate Only:  if the overtime rate is equal to only the “half” of one and one-half of the regular rate.
    –  Double Time Rate:  if the overtime rate is equal to two times the regular rate.

These enhancements allow organizations to continue to calculate overtime as they have done in the past, while allowing the correct amount of qualified overtime compensation to be reported on the 2026 W2s.

Updated Instructions for 2026 Overtime Reporting

To prepare for 2026, review and update overtime setup as follows:

  • Overtime must be set up as a separate pay code, separate from regular rate pay codes.
  • Separate overtime pay codes must be defined for each method used:
    –  Full overtime rate of time and a half
    –  Overtime paid as just the “half” amount of the time and a half rate
    –  Overtime paid as double time (if applicable)

By having separate overtime pay codes defined, you will be able to specify the correct Federal Form Box ID to report the qualified overtime compensation on the 2026 W2s, and also designate the rate method used so the appropriate amount will be posted.

Additional Setup Reminders

  • Select the Overtime field in the Pay Codes option for all overtime pay codes.
  • If using the Time Cards option in Payroll:
    –  Verify the regular rate pay codes are tied to the applicable overtime pay codes by completing the Overtime Pay Code ID field in the Pay Codes option.
    –  Verify overtime is set within the Payroll System File to calculate based on 40 hours per week rather than 8 hours per day.
  • Additionally, if needed, use the Prorate Overtime field with the Time Cards option to eliminate having to manually calculate a blended overtime rate, as the Prorate Overtime option calculates the overtime proportionately to the hours worked at the various pay codes for employees who are paid with multiple pay codes.  For example, if an employee worked 30 hours as a cook, 10 hours as a library assistant, and also had 10 hours of overtime, the Prorate Overtime option calculates 7.5 hours of overtime using the overtime pay code for cook and 2.5 hours using the overtime pay code for library assistant.

For more information on setting up overtime pay codes correctly for 2026, click here to view the appropriate Training Tidbit; and for more information on prorating overtime with entering or importing time cards, click here to view the Prorate Overtime Tutorial.