As employers continue preparing for the overtime reporting requirements under the One Big Beautiful Bill Act (OBBBA), questions are emerging around how overtime should be calculated and, more importantly, how “qualified overtime compensation” must be identified for 2026 Form W-2 reporting.
These questions are especially common among public sector employers and organizations operating under Collective Bargaining Agreements (CBAs), where employees may earn multiple pay rates or receive overtime premiums that exceed what federal law requires.
Employers should keep in mind that 2025 is a transitional year, from a reporting perspective, and while there are no changes to 2025 Forms W‑2 nor 1099 to reflect the OBBBA reporting requirements, those forms will be updated beginning in tax year 2026.
What Is “Weighted Overtime,” & Why Is It Coming Up Now?
Weighted overtime, sometimes referred to as a “blended” or “weighted average” rate, is not new. It is a long-standing Fair Labor Standards Act (FLSA) concept that applies when an employee works at more than one hourly rate during the same workweek.
Under the FLSA, when multiple rates are earned in a single work period:
- All eligible compensation for hours actually worked is combined
- Total compensation is divided by total hours worked
- The result is the employee’s regular rate for that workweek
- Overtime is computed based on that regular rate, and the premium component is typically the incremental amount over the straight-time rate (often described as the “half” portion in a standard time-and-a-half structure)
Because OBBBA’s overtime deduction is tied directly to the FLSA-required overtime premium, the weighted regular rate is often unavoidable, even when it complicates payroll processing.
What Counts as “Qualified Overtime Compensation” Under OBBBA?
This matters now because of the OBBBA’s overtime-related individual deduction, and the reporting that supports it, hinges on the FLSA calculation of overtime. Specifically, for OBBBA purposes, qualified overtime compensation is not the total amount paid in an overtime category. It is ONLY the overtime premium required under the FLSA, meaning the portion in excess of the employee’s regular rate. In multi-rate scenarios, that regular rate is often the “weighted” regular rate.
Qualified overtime does NOT include:
- Overtime amounts not required under federal overtime rules (even if paid by policy or practice)
- Overtime/premiums in excess of the FLSA-required premium (for example, “double time” policies where the extra premium exceeds what FLSA requires)
- “Overtime” paid for reasons unrelated to FLSA thresholds (e.g., holiday/weekend premiums when no FLSA overtime is triggered)
How CBAs Complicate the Calculation
Many CBAs create additional pay elements such as:
- Differentials (e.g. heavy equipment, special duty)
- Out-of-title pay
- Holiday or special-event overtime
- Law enforcement or fire-specific premiums
While some of these amounts may not themselves qualify for the OBBBA deduction, they may still be included in the FLSA regular-rate calculation if they are paid for hours actually worked and are not excluded by statute.
That matters because:
- Including these amounts increases the employee’s regular rate
- A higher regular rate increases the FLSA-required overtime premium
- The premium portion tied to that regular rate is what becomes reportable as qualified overtime compensation
In other words, even if a premium is not itself “qualified overtime compensation,” it may indirectly increase the FLSA regular rate, which increases the FLSA-required premium that ultimately becomes the relevant OBBBA figure.
Are Employers Required to Use Weighted Overtime for 2026 W-2 Reporting?
In practice: Yes, when FLSA rules require it.
If employees earn multiple rates during a workweek, the FLSA requires that overtime be calculated using a weighted average regular rate. Because OBBBA relies on that same FLSA framework to define qualified overtime compensation, employers cannot bypass weighted overtime calculations solely for W-2 reporting purposes.
Practical Payroll Considerations
This is where many employers are encountering challenges, particularly when payroll systems aggregate multiple overtime earn codes into a single “overtime” bucket, pay overtime at a rate exceeding time-and-a-half (creating an “excess premium” that is not qualified), or apply weighted calculations automatically but do not clearly output the premium-only component.
Best practices include:
- Inventory overtime-eligible earn codes and identify which ones feed the regular rate vs. are excludable
- Configure the payroll system (or a parallel calculation) to identify the premium portion (excess over regular rate), not total overtime dollars
- Confirm overtime practices distinguish FLSA-required overtime from overtime paid only due to policy/CBA
- Retain calculation support (rate derivation, hours basis, earn-code treatment, and a clear audit trail)
For tax year 2025, the IRS expressly acknowledged individuals may not receive a separate accounting of qualified overtime on written statements. To still take advantage of the deduction, the IRS allows employees to use reasonable methods to isolate the FLSA premium portion, when it is not separately stated, provided the methodology is consistent and well-documented.
Special Rules for Fire & Law Enforcement Employees
Public sector employers with fire protection or law enforcement personnel should pay special attention to the FLSA’s alternative overtime frameworks. The IRS has specifically referenced these concepts, such as overtime determined on work periods longer than a standard 40-hour workweek for certain public sector employees (e.g., under 29 USC § 207(k)) and certain hospital/residential care arrangements (e.g., 29 USC § 207(j)). These alternative structures can materially affect what constitutes “overtime hours” for FLSA purposes, and the computation of the regular rate and premium portion that feeds the OBBBA concept. Notice 2025-69 is specifically helpful as it includes specific guidance reflecting the FLSA’s alternative overtime thresholds (such as 14-day work periods).
Key Takeaways
OBBBA did not create new overtime rules; it layered tax reporting and deductibility requirements on top of existing FLSA concepts. As a result, employers must ensure their payroll processes accurately reflect:
- The FLSA regular rate
- Weighted overtime where multiple rates apply
- A clear separation of the FLSA-required overtime premium portion for reporting purposes
- Consistent documentation and reconciliation
Early coordination between payroll, HR, finance, and system teams is critical to reduce year-end corrections and employee confusion when 2026 W-2s are issued.
If you have any questions or are interested in learning more, we are here to help. Please do not hesitate to reach out and discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
