| Compliance Alert

IRS Issues Updated FAQs for "No Tax on Overtime" Compensation under the OBBBA

What's new:  On Aug. 6, 2026, the IRS issued Fact Sheet FS-2026-13, which updates FAQs about the deductions for qualified overtime compensation - commonly referred to as "No Tax on Overtime." The new Fact Sheet revises and supersedes the earlier FAQs that IRS issued in FS 2026-01 on January 23, 2026.

Why it matters:  For tax years 2025 through 2028, individuals who receive qualified overtime compensation under the Fair Labor Standards Act (FLSA) may deduct the amount that exceeds their regular rate of pay (generally, the "half" portion of "time-and-a-half" compensation) and is reported on a Form W-2 or Form 1099. The IRS did not require employers to report qualified overtime compensation separately on Forms W-2, 1099-NEC, and 1099-MISC for tax year 2025. Employers are required to separately report qualified overtime compensation for tax year 2026 and later years.

The new Fact Sheet:

• Includes updates throughout, such as adding an index, renumbering certain FAQs, and making clarifying revisions to most questions.
• Deletes information that was applicable solely to the 2025 taxable year.
• Provides clarification on the limits and timing of the qualified overtime compensation deduction.
• Provides additional information on coverage and exemptions under the FLSA.
• Provides detailed information on Form W-2, Form 1099-MISC, and Form 1099-NEC requirements applicable to employers and payors of qualified overtime compensation.
• Adds information on federal income tax withholding procedures related to qualified overtime compensation.
• Adds information on the requirement that qualified overtime compensation must be separately reported on Form W-2 to claim the deduction.

Go deeper:  The IRS previously issued Notice 2025-62 providing penalty relief to employers and other payers for tax year 2025 regarding new information reporting requirements for qualified overtime compensation.

What we're doing:  NADA remains in close contact with the Department of Treasury and the IRS to raise key questions and issues dealers face. NADA will update its members on any additional guidance from the agencies as more information becomes available.