Two provisions from the One Big Beautiful Bill Act are now directly affecting how businesses run payroll: the “no tax on overtime” deduction and Trump Accounts. Both come with real compliance responsibilities for employers, not just tax changes for individuals. Here is what the IRS has actually published, and what it means for your business.
No Tax on Overtime: What It Actually Means
According to IRS.gov, workers who receive qualified overtime compensation, the “half” portion of “time-and-a-half” pay required under the Fair Labor Standards Act, may deduct that premium from their taxable income. The deduction is capped at $12,500 for individual filers and $25,000 for joint filers, and it phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers). It is available whether or not the taxpayer itemizes, and it applies to tax years 2025 through 2028.
What Changed for Payroll in 2026
For additional industry coverage of this reporting requirement, see the Warren Averett guide to the new overtime and tips payroll reporting requirements.
This is the part employers cannot afford to miss. For tax year 2025, employees could substantiate their own qualified overtime for the deduction. That changed with IRS Fact Sheet FS-2026-13, updated August 6, 2026: starting with tax year 2026, employers must separately report qualified overtime compensation on Form W-2, Box 12, using code TT.
The IRS guidance is direct on the consequence: if an employer fails to report the correct amount in Box 12, Code TT, the employee is legally barred from claiming the deduction, regardless of how much overtime they actually worked. If an employer discovers an error, they are required to file a corrected Form W-2c. For any business running overtime-eligible payroll, this turns a payroll line item into a real compliance obligation.
Internal Controls Businesses Should Have in Place
A few practical safeguards go a long way here:
- Confirm your payroll system or provider can separately track the FLSA overtime premium, not just total overtime hours, since only the premium portion qualifies.
- Build a year-end reconciliation step before W-2s go out, comparing payroll-system overtime totals against what will populate Box 12, Code TT.
- Document your process for correcting errors, including who is responsible for filing Form W-2c if a discrepancy is found.
- Keep supporting payroll records on file. If the IRS or an employee ever questions a reported amount, you want a clear paper trail.
Trump Accounts: A New Payroll-Adjacent Benefit
Separately, the OBBBA created Trump Accounts, described by the IRS as “a new type of individual retirement account for children.” Any child with a Social Security number who has not turned 18 can have one established, and there are no income restrictions. Children born between January 1, 2025, and December 31, 2028, who are U.S. citizens qualify for a one-time $1,000 pilot contribution from the federal government.
Employer Contributions: What Business Owners Need to Know
For independent reporting on this guidance, see CNBC coverage of the Treasury Aug. 11, 2026 announcement on employer-matched Trump Account contributions.
This is where it becomes relevant to payroll. Under new Code Section 128, employers may contribute up to $2,500 per year, per employee, to a Trump Account for that employee’s dependent, either directly or through payroll deferral, and the contribution is excluded from the employee’s taxable income. The Treasury and IRS issued proposed regulations on this on August 11, 2026, with a public comment period running through September 25, 2026, and a hearing scheduled for October 15, 2026, so the rules are not yet finalized.
To qualify for the favorable tax treatment, the guidance requires employers to maintain a separate written Trump Account contribution program for the exclusive benefit of employees, and that program must follow nondiscrimination rules similar to those for dependent care assistance programs, meaning it cannot disproportionately favor highly compensated employees.
What Business Owners Should Do Now
If your business runs any overtime-eligible payroll, the Box 12, Code TT reporting requirement is not optional starting with 2026 wages, so it is worth confirming with your payroll provider now, not at year-end. If you are considering offering Trump Account contributions as an employee benefit, keep in mind the rules are still in proposed form and will likely be refined before the October hearing.
Founder Sara Zidal, CPA, brings over a decade of accounting and advisory experience, helping Indiana businesses navigate payroll compliance and new tax law changes with confidence.
