The IRS recently updated its FAQs on the overtime deduction created by the One Big Beautiful Bill Act (OBBBA), clarifying how qualified overtime compensation should be calculated and reported.
Employees claim the deduction on their individual income tax returns, but employers play an important role in supporting accurate reporting because qualified overtime compensation generally must be separately reported on Form W-2.
Not all overtime pay qualifies
For purposes of the deduction, only overtime pay required under the Fair Labor Standards Act (FLSA) generally qualifies. In most cases, only the overtime premium portion of the payment qualifies for the deduction. For example, in a time-and-a-half calculation, the additional half-time amount may qualify — not the employee’s full overtime wage.
Overtime paid solely because of state law, collective bargaining agreements, or internal policies generally does not qualify unless the payment is necessary to satisfy federal overtime requirements. This distinction may be especially important for financial institutions with multiple branches, employees in different states, or payroll policies that go beyond federal minimum requirements.
What changes in 2026
Beginning in 2026, financial institutions must separately report qualified overtime compensation on Form W-2. Employees will use the amount reported by their employer to calculate the deduction on their individual income tax return.
The deduction is currently available for tax years 2025 through 2028 and is capped at $12,500 for single filers and $25,000 for married taxpayers filing jointly. If the reported amount is incorrect, employees generally will need a corrected Form W-2 to claim the proper deduction.
How banks and credit unions can prepare
Based on the current IRS FAQs, financial institutions may want to take the following steps before the 2026 reporting season:
- Review how overtime compensation is currently tracked in your payroll system.
- Confirm whether your payroll provider can separately identify and report qualified overtime compensation on Form W-2.
- Compare federal overtime requirements with any state-specific rules, collective bargaining agreements, or internal policies.
- Prepare HR, payroll, and branch leadership teams for employee questions about eligible overtime amounts.
- Continue monitoring IRS guidance before the 2026 reporting season.
The new deduction may create questions for both employees and financial institution leadership. Taking time now to review payroll tracking, reporting capabilities, and employee communication plans can help reduce corrections and confusion later.
For the complete IRS FAQs see FS-2026-13.
Contact a Pinion tax advisor to talk through how the overtime deduction rules may affect your bank or credit union before the 2026 reporting requirements take effect.
