In August 2026, the Internal Service Revenue (IRS) released new guidance on a major tax benefit that could affect employers and workers in Ohio and across the country. As labor laws change, the IRS is giving clearer rules on how businesses should report and deduct overtime costs. If your company is preparing for the next tax years, understanding the latest updates on overtime pay deductions is key to staying compliant while planning taxes wisely.
The background for the updates
The One Big Beautiful Bill Act (OBBBA) created a new tax deduction for some overtime compensation. For tax years 2025 through 2028, it allows single filers deductions up to $12,500 while joint filers deductions can reach $25,000. Beginning in 2026, employees will usually need their overtime pay listed separately on Form W-2 to claim the deduction. Both itemizers and non-itemizers can use it, but the deduction is generally lower for higher-income taxpayers.
Only overtime required under the Fair Labor Standards Act (FLSA) qualifies, and exempt employees cannot claim the deduction. If overtime payment is on a time-and-a-half basis, only the extra half-time portion generally counts for the reduction.
New reporting details and documentation
Because the OBBBA lacked clear details on reporting, the IRS updated its FAQs to reduce audit confusion and encourage consistent reporting. Starting in 2026, employers must report all eligible overtime pay separately, even if it is more than the allowed deduction. Employers must also calculate and pay overtime correctly under the new rules.
To support the deduction, employers should keep accurate time records, proof of correct overtime payments and documents showing worker eligibility. Clear records help business owners avoid classification mistakes and show that the overtime deduction is a valid business expense.
Practical compliance tips for businesses
Auditing your payroll software can help keep your digital systems updated to reflect the latest IRS reporting categories. It also helps you track overtime pay correctly.
Working with a certified public accountant (CPA) to review these updates can also help prevent overpayments or under-reporting. Training your HR and payroll staff on the updated FAQ interpretation can help ensure they apply the rules consistently each day and maintain accurate records.
Keeping your business compliant
Staying ahead of IRS updates is the best way to protect your business from legal and financial liability. A legal professional can help you audit your current practices while helping you better understand new tax law changes.