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Qualified Overtime: Setting up income items

Eric Updated by Eric

This feature was designed for Qualified Overtime for Payroll System 2026 and later.

Three major caveats in the new "No Tax on Overtime" deduction that are important to understand are:

  • Only hours worked over 40 in a week count as overtime as far as the deduction is concerned. For example, time-and-a-half earned for working more than 8 hours in a day in states like California do not count as overtime.
  • For overtime hours that do count, only the premium portion of overtime may be deducted, limited to the "half" in "time-and-a-half" (e.g. one-third of it). Furthermore, only one-quarter of double-time qualifies.
  • In 2026 and beyond, Qualified Overtime amounts will be transferred to Box 12 on Form W-2.

Users should confirm that their overtime Income Items are set-up as follows.

Employers who did not give more overtime than what is federally required

If you already have the program-provided Income Item Overtime Pay (hourly)

  1. Double-click on an employer and click Payroll Setup.
  2. Double-click that Income Item and confirm its settings are as follows.
  3. If they differ – or you have a customized Overtime payroll item that came forward from 2025 (that is used only for hours exceedingly 40 in a week, paid at time-and-a-half):
    1. Select Box 12 in Report amount on.
    2. Select TT - Qualified Overtime Compensation in Box 12 code.
    3. Select 33.33% in Pct of Amount to report there.
      If there is a description in Box 14 from the previous year, it will automatically be removed upon saving.
  4. Click OK then Save.

If setting up a new Income Item for Qualified Overtime

  1. Click Add.
  2. Select Overtime Pay (hourly) in Full name.
  3. Finish setting up the income item, including how the amounts should be reported then click OK.
  4. Click the desired button when prompted to mark existing employees.
    If the income item doesn’t apply to many employees, consider answering “No,” then marking “Overtime Pay (hourly)” only on applicable employees' Rate tab.
For any double-time overtime, “Overtime Pay 2 (hourly)” may be used and set up with 25% to transfer to Box 12

Only hours above 40 in any given week are considered Qualified Overtime Compensation.

Employers who give more overtime than what is federally required

Method 1: Put unqualified overtime in its own category

This method assumes the amounts put into the built-in OT (and OT2, if applicable) income items will be qualified overtime to transfer to Box 12 and that unqualified overtime will be put into user-added income items.

  1. On the Income Item setup screen click Add.
  2. Select the built-in Non-Qualified Overtime in Full Name, or create your own custom item. Fill out the desired fields. See the example below, configuring it to your situation.
    Do not have Non-Qualified OT transfer to Box 12 on the W-2.
  3. Click OK then Save.

Method 2: Utilize the Qualified Overtime (Info Only) column

If the employer offers overtime or exists in a state that has overtime rules beyond what is federally required (e.g. daily overtime), the user can instruct the program to flow a specified percentage of that overtime to a Qualified Overtime (Info only) income item.

This new income item is not included in net pay, and exists to show the user how much of overtime qualifies according to the rules the user creates, to store that value, and to transfer it to Box 12.

  1. Add the new Qualified Overtime (Info only) income item to the employer's setup screen.
    1. Select Box 12 in Report amount on.
    2. Select TT - Qualified Overtime Compensation in Box 12 code.
    3. Select 100% in Pct of Amount to report there.
    4. Click OK.
  2. Select a different overtime income item then click Edit, e.g. Overtime Pay (hourly).
    1. Select Another income item in Report amount on.
    2. Select Qualified Overtime (Info Only) in Income item:.
    3. Select the applicable percentage in Pct of Amount to report there.
      Generally, time-and-half over 40 hours/week should be 33.33%, double time over 40 hours/week should be 25%, and daily overtime or any other overtime that is granted when working under 40 hours/week should be 0%.
    4. Click OK.
  3. Repeat for any other overtime income item(s), e.g. Overtime Pay 2 (hourly).

When hours/amounts are input for overtime, the qualified amounts will be calculated in the Qual OT column.

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Treasury Tipped Occupation Codes (TTOC)

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